UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-11071
UGI CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2668356
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UGI CORPORATION
460 North Gulph Road, King of Prussia, PA
(Address of principal executive offices)
19406
(Zip Code)
(610) 337-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
----- -----
At July 31, 2005, there were 104,512,055 shares of UGI Corporation Common
Stock, without par value, outstanding.
UGI CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGES
-------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2005,
September 30, 2004 and June 30, 2004 1
Condensed Consolidated Statements of Income for the three
and nine months ended June 30, 2005 and 2004 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended June 30, 2005 and 2004 3
Notes to Condensed Consolidated Financial Statements 4 - 20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21 - 35
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35 - 37
Item 4. Controls and Procedures 38
PART II OTHER INFORMATION
Item 6. Exhibits 39 - 40
Signatures 41
-i-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Millions of dollars)
June 30, September 30, June 30,
2005 2004 2004
-------- ------------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 207.4 $ 149.6 $ 160.4
Short-term investments (at cost, which approximates fair value) 65.0 50.0 25.0
Accounts receivable (less allowances for doubtful accounts of
$33.0, $22.3 and $27.6, respectively) 424.3 367.3 425.0
Accrued utility revenues 8.5 9.7 8.1
Inventories 168.8 198.4 127.4
Deferred income taxes 39.6 14.3 22.5
Prepaid expenses 15.8 21.6 22.4
Other current assets 14.8 25.0 8.1
-------- -------- --------
Total current assets 944.2 835.9 798.9
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $966.7, $892.4 and $880.0, respectively) 1,787.3 1,781.9 1,881.2
Goodwill and excess reorganization value 1,233.9 1,245.9 1,174.8
Other intangible assets (less accumulated amortization of
$41.4, $27.5 and $23.5, respectively) 176.4 184.4 140.5
Utility regulatory assets 66.8 65.0 63.0
Other assets 120.1 121.7 128.8
-------- -------- --------
Total assets $4,328.7 $4,234.8 $4,187.2
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 208.7 $ 122.8 $ 115.4
Current maturities of UGI Utilities preferred shares subject to
mandatory redemption, without par value -- 20.0 1.0
AmeriGas Propane bank loans 15.0 -- --
UGI Utilities bank loans 49.5 60.9 30.1
Other bank loans 16.5 17.2 18.8
Accounts payable 276.8 323.9 270.3
Other current liabilities 364.6 372.8 299.3
-------- -------- --------
Total current liabilities 931.1 917.6 734.9
Long-term debt 1,458.6 1,547.3 1,554.8
Deferred income taxes 468.9 440.8 477.1
UGI Utilities preferred shares subject to
mandatory redemption, without par value -- -- 19.0
Other noncurrent liabilities 324.1 316.6 358.1
-------- -------- --------
Total liabilities 3,182.7 3,222.3 3,143.9
Commitments and contingencies (note 9)
Minority interests 166.7 178.4 204.9
Common stockholders' equity:
Common Stock, without par value (authorized - 150,000,000 shares;
issued - 115,152,994 shares) 769.9 762.8 759.6
Retained earnings 292.6 146.2 164.9
Accumulated other comprehensive income (1.6) 22.6 15.7
Notes receivable from employees -- (0.2) (0.3)
-------- -------- --------
1,060.9 931.4 939.9
Treasury stock, at cost (81.6) (97.3) (101.5)
-------- -------- --------
Total common stockholders' equity 979.3 834.1 838.4
-------- -------- --------
Total liabilities and stockholders' equity $4,328.7 $4,234.8 $4,187.2
======== ======== ========
See accompanying notes to condensed consolidated financial statements.
-1-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Millions of dollars, except per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Revenues $ 932.5 $ 823.4 $4,082.6 $3,033.7
Costs and expenses:
Cost of sales 628.8 537.5 2,764.6 2,048.9
Operating and administrative expenses 233.6 217.2 736.7 564.0
Utility taxes other than income taxes 3.2 3.1 10.1 9.8
Depreciation and amortization 36.5 38.5 111.8 94.3
Other income, net (7.2) (6.8) (40.9) (7.1)
-------- -------- -------- --------
894.9 789.5 3,582.3 2,709.9
-------- -------- -------- --------
Operating income 37.6 33.9 500.3 323.8
Income (loss) from equity investees (0.7) (0.6) (2.0) 12.0
Loss on extinguishment of debt (33.6) -- (33.6) --
Interest expense (32.1) (33.5) (98.9) (86.9)
Minority interests, principally in AmeriGas Partners 27.9 14.0 (45.7) (64.3)
-------- -------- -------- --------
Income (loss) before income taxes (0.9) 13.8 320.1 184.6
Income tax benefit (expense) 1.6 (5.5) (123.9) (70.4)
-------- -------- -------- --------
Net income $ 0.7 $ 8.3 $ 196.2 $ 114.2
======== ======== ======== ========
Earnings per common share:
Basic $ 0.01 $ 0.08 $ 1.89 $ 1.24
======== ======== ======== ========
Diluted $ 0.01 $ 0.08 $ 1.86 $ 1.21
======== ======== ======== ========
Average common shares outstanding (millions):
Basic 104.312 101.830 103.542 92.010
======== ======== ======== ========
Diluted 106.024 103.816 105.422 94.084
======== ======== ======== ========
Dividends declared per common share $ 0.1688 $ 0.1563 $ 0.4813 $ 0.4413
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
-2-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Millions of dollars)
Nine Months Ended
June 30,
-----------------
2005 2004
------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 196.2 $ 114.2
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 111.8 94.3
Provision for uncollectible accounts 19.8 15.5
Minority interests 45.7 64.3
Deferred income taxes, net 7.2 2.1
Loss on extinguishment of debt 33.6 --
Other, net (7.7) (10.8)
Net change in:
Accounts receivable and accrued utility revenues (76.1) (50.9)
Inventories 41.8 30.4
Deferred fuel costs 11.2 2.4
Accounts payable (57.3) (58.8)
Other current assets and liabilities (9.5) (17.9)
------- -------
Net cash provided by operating activities 316.7 184.8
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (112.0) (86.5)
Net proceeds from disposals of assets 14.1 6.0
Acquisitions of businesses, net of cash acquired (31.7) (283.7)
Short-term investments (increase) decrease (15.0) 25.0
Other, net 6.6 0.7
------- -------
Net cash used by investing activities (138.0) (338.5)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on UGI Common Stock (49.9) (40.4)
Distributions on AmeriGas Partners publicly held Common Units (49.7) (45.9)
Issuance of debt 506.0 30.1
Repayment of debt (526.2) (61.3)
AmeriGas Propane bank loans increase 15.0 --
Decrease in UGI Utilities bank loans with maturities of three months or less (11.4) (10.6)
Other bank loans (decrease) increase (0.3) 0.5
Redemption of UGI Utilities preferred shares subject to mandatory redemption (20.0) --
Issuance of AmeriGas Partners Common Units -- 51.2
Issuance of UGI Common Stock 22.8 249.0
------- -------
Net cash (used) provided by financing activities (113.7) 172.6
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (7.2) (0.6)
------- -------
Cash and cash equivalents increase $ 57.8 $ 18.3
======= =======
Cash and cash equivalents:
End of period $207.4 $ 160.4
Beginning of period 149.6 142.1
------- -------
Increase $ 57.8 $ 18.3
======= =======
See accompanying notes to condensed consolidated financial statements.
-3-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
1. BASIS OF PRESENTATION
UGI Corporation ("UGI") is a holding company that owns and operates natural
gas and electric utility, electricity generation, retail propane
distribution, energy marketing and related businesses in the United States.
Through foreign subsidiaries and a joint-venture affiliate, UGI also
distributes liquefied petroleum gases ("LPG") in France, Austria, the Czech
Republic, Slovakia and China.
We conduct a national propane distribution business through AmeriGas
Partners, L.P. ("AmeriGas Partners") and its principal operating
subsidiaries AmeriGas Propane, L.P. ("AmeriGas OLP") and AmeriGas OLP's
subsidiary, AmeriGas Eagle Propane, L.P. ("Eagle OLP"). AmeriGas Partners,
AmeriGas OLP and Eagle OLP are Delaware limited partnerships. UGI's wholly
owned second-tier subsidiary AmeriGas Propane, Inc. (the "General Partner")
serves as the general partner of AmeriGas Partners and AmeriGas OLP.
AmeriGas OLP and Eagle OLP (collectively referred to as "the Operating
Partnerships") comprise the largest retail propane distribution business in
the United States serving residential, commercial, industrial, motor fuel
and agricultural customers from locations in 46 states. We refer to
AmeriGas Partners and its subsidiaries together as "the Partnership" and
the General Partner and its subsidiaries, including the Partnership, as
"AmeriGas Propane." At June 30, 2005, the General Partner and its wholly
owned subsidiary Petrolane Incorporated ("Petrolane") collectively held a
1% general partner interest and a 44.6% limited partner interest in
AmeriGas Partners, and effective 46.1% and 46.0% ownership interests in
AmeriGas OLP and Eagle OLP, respectively. Our limited partnership interest
in AmeriGas Partners comprises 24,525,004 Common Units. The remaining 54.4%
interest in AmeriGas Partners comprises 29,967,601 publicly held Common
Units representing limited partner interests.
Our wholly owned subsidiary, UGI Enterprises, Inc. ("Enterprises") (1) owns
and operates LPG distribution businesses in France ("Antargaz"); (2) owns
and operates LPG distribution businesses in Austria, the Czech Republic and
Slovakia ("FLAGA"); and (3) participates in a propane joint-venture
business in China. We refer to our foreign operations collectively as
"International Propane."
Our natural gas and electric distribution utility businesses are conducted
through our wholly owned subsidiary, UGI Utilities, Inc. ("UGI Utilities").
UGI Utilities owns and operates a natural gas distribution utility ("Gas
Utility") in parts of eastern and southeastern Pennsylvania and an
electricity distribution utility ("Electric Utility") in northeastern
Pennsylvania. Gas Utility and Electric Utility are subject to regulation by
the Pennsylvania Public Utility Commission ("PUC").
In addition, Enterprises conducts an energy marketing business primarily in
the Eastern region of the United States through its wholly owned
subsidiary, UGI Energy Services, Inc. ("Energy Services"). Energy Services'
wholly owned subsidiary UGI Development Company ("UGID"), and UGID's
subsidiaries and joint-venture affiliate Hunlock Creek Energy Ventures, own
and operate interests in Pennsylvania-based electricity generation
-4-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
assets. Through other subsidiaries, Enterprises owns and operates a
heating, ventilation, air-conditioning and refrigeration service business
in the Middle Atlantic states ("HVAC/R").
Our condensed consolidated financial statements include the accounts of UGI
and its controlled subsidiary companies, which, except for the Partnership,
are majority owned, and are together referred to as "we" or "the Company."
We eliminate all significant intercompany accounts and transactions when we
consolidate. We report the public's limited partner interests in the
Partnership and the outside ownership interest in a subsidiary of Antargaz
as minority interests. Entities in which we own 50 percent or less and in
which we exercise significant influence over operating and financial
policies are accounted for by the equity method. Prior to the March 2004
acquisition of the 80.5% remaining ownership interests in AGZ Holding that
we did not already own, Antargaz was accounted for by the equity method.
The accompanying condensed consolidated financial statements are unaudited
and have been prepared in accordance with the rules and regulations of the
U.S. Securities and Exchange Commission ("SEC"). They include all
adjustments which we consider necessary for a fair statement of the results
for the interim periods presented. Such adjustments consisted only of
normal recurring items unless otherwise disclosed. The September 30, 2004
condensed consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America.
These financial statements should be read in conjunction with the financial
statements and related notes included in our Annual Report on Form 10-K for
the year ended September 30, 2004 ("Company's 2004 Annual Report"). Due to
the seasonal nature of our businesses, the results of operations for
interim periods are not necessarily indicative of the results to be
expected for a full year.
EARNINGS PER COMMON SHARE. On April 26, 2005, UGI's Board of Directors
approved a 2-for-1 common stock split. On May 24, 2005 the Company issued
one additional common share for every common share outstanding to
shareholders of record May 17, 2005. Average shares outstanding, basic and
diluted earnings per share and dividends declared per share for the three-
and nine month periods ended June 30, 2005 are reflected on a post-split
basis. Prior-year amounts have been retroactively restated to reflect the
effects of the common stock split.
-5-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
Basic earnings per share reflect the weighted-average number of common
shares outstanding. Diluted earnings per share include the effects of
dilutive stock options and common stock awards. Shares used in computing
basic and diluted earnings per share are as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2005 2004 2005 2004
------- ------- ------- ------
Denominator (millions of shares):
Average common shares
outstanding for basic computation 104.312 101.830 103.542 92.010
Incremental shares issuable for
stock options and awards 1.712 1.986 1.880 2.074
------- ------- ------- ------
Average common shares outstanding for
diluted computation 106.024 103.816 105.422 94.084
------- ------- ------- ------
STOCK-BASED COMPENSATION. As permitted by Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), we apply the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25"), in recording compensation expense for grants of stock, stock options
and other equity instruments to employees. We use the intrinsic value
method prescribed by APB 25 for our stock-based employee compensation
plans.
-6-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
We recognized total stock and unit-based compensation expense of $5.2
million and $12.0 million in the three and nine months ended June 30, 2005,
respectively, and $1.8 million and $9.1 million in the three and nine
months ended June 30, 2004, respectively. If we had determined stock-based
compensation expense under the fair value method prescribed by SFAS 123,
net income and basic and diluted earnings per share for the three and nine
months ended June 30, 2005 and 2004 would have been as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2005 2004 2005 2004
----- ----- ------ ------
Net income, as reported $ 0.7 $ 8.3 $196.2 $114.2
Add: Stock and unit-based employee
compensation expense included in
reported net income, net of related tax effects 3.1 1.1 7.2 5.5
Deduct: Total stock and unit-based
employee compensation expense
determined under the fair value method
for all awards, net of related tax effects (3.4) (1.4) (8.7) (6.3)
----- ----- ------ ------
Pro forma net income $ 0.4 $ 8.0 $194.7 $113.4
----- ----- ------ ------
Basic earnings per share:
As reported $0.01 $0.08 $ 1.89 $ 1.24
Pro forma $ -- $0.08 $ 1.88 $ 1.23
Diluted earnings per share:
As reported $0.01 $0.08 $ 1.86 $ 1.21
Pro forma $ -- $0.08 $ 1.85 $ 1.21
----- ----- ------ ------
COMPREHENSIVE INCOME. The following table presents the components of
comprehensive income (loss) for the three and nine months ended June 30,
2005 and 2004.
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2005 2004 2005 2004
------ ----- ------ ------
Net income $ 0.7 $ 8.3 $196.2 $114.2
Other comprehensive (loss) income (31.1) 4.3 (24.2) 11.0
------ ----- ------ ------
Comprehensive (loss) income $(30.4) $12.6 $172.0 $125.2
------ ----- ------ ------
Other comprehensive (loss) income principally comprises (1) changes in the
fair value of derivative commodity instruments, interest rate protection
agreements and foreign currency derivatives qualifying as hedges and (2)
foreign currency translation adjustments, net of reclassifications to net
income.
RECLASSIFICATIONS. We have reclassified certain prior-year period balances
to conform to the current-period presentation.
-7-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
USE OF ESTIMATES. We make estimates and assumptions when preparing
financial statements in conformity with accounting principles generally
accepted in the United States of America. These estimates and assumptions
affect the reported amounts of assets and liabilities, revenues and
expenses, as well as the disclosure of contingent assets and liabilities.
Actual results could differ from these estimates.
2. ACQUISITIONS
In November 2004, a wholly owned subsidiary of Energy Services acquired
from ConocoPhillips Company ("Conoco") and a wholly owned, indirect
subsidiary of AmeriGas OLP, in separate transactions, 100% of the issued
and outstanding common stock of Atlantic Energy, Inc. ("Atlantic Energy"),
for an aggregate purchase price of approximately $23.4 million in cash,
subject to post-closing adjustments. Atlantic Energy's principal asset is a
20 million gallon propane storage terminal located in Chesapeake, Virginia.
We are currently in the process of completing the review and determination
of the fair value of the assets acquired and liabilities assumed,
principally the fair value of the terminal. The effect of the sale of
AmeriGas OLP's 50% ownership interest in Atlantic Energy to Energy Services
is eliminated in consolidation and only the 50% of Atlantic Energy's assets
and liabilities acquired from Conoco have been subject to a preliminary
purchase price allocation. In connection with this acquisition, Atlantic
Energy and AmeriGas OLP entered into a long-term propane supply agreement.
The pro forma effect of this acquisition was not material to our results of
operations.
Also, during the nine months ended June 30, 2005, AmeriGas OLP completed
several acquisitions of small retail propane distribution businesses. The
operating results of these businesses have been included in our operating
results from their respective dates of acquisition. The pro forma effects
of these transactions were not material to our results of operations.
3. SEGMENT INFORMATION
We have organized our business units into six reportable segments generally
based upon products sold, geographic location (domestic or international)
or regulatory environment. Our reportable segments are: (1) AmeriGas
Propane; (2) an international LPG segment comprising Antargaz; (3) an
international LPG segment comprising FLAGA and our international LPG equity
investment in China ("Other"); (4) Gas Utility; (5) Electric Utility; and
(6) Energy Services (comprising Energy Services' gas marketing business,
UGID's electricity generation business and Atlantic Energy's propane
terminal business). We refer to both international segments collectively as
"International Propane."
The accounting policies of the six segments disclosed are the same as those
described in the Significant Accounting Policies note contained in the
Company's 2004 Annual Report. We evaluate AmeriGas Propane's performance
principally based upon the Partnership's earnings before interest expense,
income taxes, depreciation and amortization ("Partnership EBITDA").
Although we use Partnership EBITDA to evaluate AmeriGas Propane's
-8-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
profitability, it should not be considered as an alternative to net income
(as an indicator of operating performance) or as an alternative to cash
flow (as a measure of liquidity or ability to service debt obligations) and
is not a measure of performance or financial condition under accounting
principles generally accepted in the United States of America. The
Company's definition of Partnership EBITDA may be different from that used
by other companies. We evaluate the performance of our International
Propane, Gas Utility, Electric Utility and Energy Services segments
principally based upon their income before income taxes.
-9-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
3. SEGMENT INFORMATION (CONTINUED)
Three Months Ended June 30, 2005:
Reportable Segments
------------------------------------------------------------
International Propane
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
-------- ------- -------- ------- -------- -------- -------- --------- -----------
Revenues $ 932.5 $ (1.1) $ 349.5 $ 89.5 $22.0 $290.6 $ 148.1 $ 15.0 $ 18.9
======== ======= ======== ====== ===== ====== ======== ====== ======
Cost of sales $ 628.8 $ -- $ 209.0 $ 54.6 $10.6 $271.9 $ 62.3 $ 8.4 $ 12.0
======== ======= ======== ====== ===== ====== ======== ====== ======
Segment profit:
Operating income (loss) (c) $ 37.6 $ -- $ 1.6 $ 7.7 $ 4.9 $ 10.6 $ 12.7 $ 0.5 $ (0.4)
Loss from equity investees (0.7) -- -- -- -- -- (0.7) -- --
Loss on extinguishment of debt (33.6) -- (33.6) -- -- -- -- -- --
Interest expense (32.1) -- (19.7) (3.9) (0.5) -- (7.1) (0.7) (0.2)
Minority interests 27.9 -- 27.8 -- -- -- 0.1 -- --
-------- ------- -------- ------ ----- ------ -------- ------ ------
Income (loss) before income taxes $ (0.9) $ -- $ (23.9) $ 3.8 $ 4.4 $ 10.6 $ 5.0 $ (0.2) $ (0.6)
======== ======= ======== ====== ===== ====== ======== ====== ======
Depreciation and amortization $ 36.5 $ -- $ 18.2 $ 5.3 $ 0.8 $ 1.5 $ 9.4 $ 1.2 $ 0.1
Partnership EBITDA (c) $ (13.7)
Segment assets (at period end) $4,328.7 $(342.9) $1,517.7 $768.7 $97.2 $254.8 $1,410.4 $153.1 $469.7
======== ======= ======== ====== ===== ====== ======== ====== ======
Investments in equity investees
(at period end) $ 13.5 $ -- $ -- $ -- $ -- $ 8.6 $ 2.2 $ 2.7 $ --
======== ======= ======== ====== ===== ====== ======== ====== ======
Goodwill and excess reorganization
value (at period end) $1,233.9 $ -- $ 618.0 $ -- $ -- $ 5.9 $ 536.5 $ 67.9 $ 5.6
======== ======= ======== ====== ===== ====== ======== ====== ======
Three Months Ended June 30, 2004:
Reportable Segments
------------------------------------------------------------
International Propane
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
-------- ------- -------- ------- -------- -------- -------- --------- -----------
Revenues $ 823.4 $ (0.9) $ 315.1 $ 97.7 $21.0 $217.3 $ 144.1 $ 12.7 $ 16.4
======== ======= ======== ====== ===== ====== ======== ====== ======
Cost of sales $ 537.5 $ -- $ 184.0 $ 65.1 $ 9.6 $200.8 $ 61.9 $ 6.6 $ 9.5
======== ======= ======== ====== ===== ====== ======== ====== ======
Segment profit:
Operating income (loss) (c) $ 33.9 $ -- $ (4.0) $ 6.9 $ 5.5 $ 10.2 $ 14.5 $ (0.2) $ 1.0
Income (loss) from equity
investees (0.6) -- 0.1 -- -- -- (0.7) -- --
Interest expense (33.5) -- (20.5) (3.9) (0.6) -- (7.4) (0.9) (0.2)
Minority interests 14.0 -- 12.9 -- -- -- 1.1 -- --
-------- ------- -------- ------ ----- ------ -------- ------ ------
Income before income taxes $ 13.8 $ -- $ (11.5) $ 3.0 $ 4.9 $ 10.2 $ 7.5 $ (1.1) $ 0.8
======== ======= ======== ====== ===== ====== ======== ====== ======
Depreciation and amortization $ 38.5 $ -- $ 20.0 $ 4.9 $ 0.6 $ 1.0 $ 10.6 $ 1.2 $ 0.2
Partnership EBITDA (c) $ 16.1
Segment assets (at period end) $4,187.2 $(356.4) $1,525.2 $735.5 $88.1 $201.8 $1,430.2 $145.5 $417.3
======== ======= ======== ====== ===== ====== ======== ====== ======
Investments in equity investees
(at period end) $ 20.1 $ -- $ 3.6 $ -- $ -- $ 9.1 $ 4.6 $ 2.8 $ --
======== ======= ======== ====== ===== ====== ======== ====== ======
Goodwill and excess reorganization
value (at period end) $1,174.8 $ -- $ 605.7 $ -- $ -- $ 2.8 $ 495.3 $ 65.7 $ 5.3
======== ======= ======== ====== ===== ====== ======== ====== ======
(a) International Propane-Other principally comprises FLAGA and our
joint-venture business in China.
(b) Corporate & Other's results principally comprise UGI Enterprises' HVAC/R
operations, net expenses of UGI's captive general liability insurance company
and UGI Corporation's unallocated corporate and general expenses and interest
income. Corporate & Other's assets principally comprise cash, short-term
investments and an intercompany loan. The intercompany interest associated with
the intercompany loan is removed in the segment presentation.
(c) The following table provides a reconciliation of Partnership EBITDA to
AmeriGas Propane operating income:
Three months ended June 30, 2005 2004
- --------------------------- ------- -------
Partnership EBITDA $(13.7) $ 16.1
Depreciation and amortization (18.2) (20.0)
Minority interests (i) (0.1) --
Income from equity investees -- (0.1)
Loss on extinguishment of debt 33.6 --
------ ------
Operating income (loss) $ 1.6 $ (4.0)
====== ======
(i) Principally represents the General Partner's 1.01% interest in AmeriGas OLP.
-10-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
3. SEGMENT INFORMATION (CONTINUED)
Nine Months Ended June 30, 2005:
Reportable Segments
------------------------------------------------------------
International Propane
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
-------- ------- -------- ------- -------- -------- -------- --------- -----------
Revenues $4,082.6 $ (3.6) $1,604.0 $506.6 $69.9 $1,051.8 $ 747.1 $ 57.3 $ 49.5
======== ======= ======== ====== ===== ======== ======== ====== ======
Cost of sales $2,764.6 $ -- $ 989.9 $338.5 $33.5 $ 995.0 $ 346.2 $ 32.9 $ 28.6
======== ======= ======== ====== ===== ======== ======== ====== ======
Segment profit:
Operating income (c) $ 500.3 $ -- $ 178.1 $ 84.4 $16.8 $ 30.7 $ 184.4 $ 5.2 $ 0.7
Loss from equity investees (2.0) -- -- -- -- -- (2.0) -- --
Loss on extinguishment of debt (33.6) -- (33.6) -- -- -- -- -- --
Interest expense (98.9) -- (60.9) (12.0) (1.5) -- (22.0) (2.3) (0.2)
Minority interests (45.7) -- (44.7) -- -- -- (1.0) -- --
-------- ------- -------- ------ ----- -------- -------- ------ ------
Income before income taxes (c) $ 320.1 $ -- $ 38.9 $ 72.4 $15.3 $ 30.7 $ 159.4 $ 2.9 $ 0.5
======== ======= ======== ====== ===== ======== ======== ====== ======
Depreciation and amortization $ 111.8 $ -- $ 56.0 $ 15.5 $ 2.3 $ 4.3 $ 29.2 $ 3.8 $ 0.7
Partnership EBITDA (d) $ 208.0
Segment assets (at period end) $4,328.7 $(342.9) $1,517.7 $768.7 $97.2 $ 254.8 $1,410.4 $153.1 $469.7
======== ======= ======== ====== ===== ======== ======== ====== ======
Investments in equity investees
(at period end) $ 13.5 $ -- $ -- $ -- $ -- $ 8.6 $ 2.2 $ 2.7 $ --
======== ======= ======== ====== ===== ======== ======== ====== ======
Goodwill and excess
reorganization value (at
period end) $1,233.9 $ -- $ 618.0 $ -- $ -- $ 5.9 $ 536.5 $ 67.9 $ 5.6
======== ======= ======== ====== ===== ======== ======== ====== ======
Nine Months Ended June 30, 2004:
Reportable Segments
------------------------------------------------------------
International Propane
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
-------- ------- -------- ------- -------- -------- -------- --------- ----------
Revenues $3,033.7 $ (2.2) $1,463.0 $490.5 $67.1 $779.0 $ 144.1 $ 47.1 $ 45.1
======== ======= ======== ====== ===== ====== ======== ====== ======
Cost of sales $2,048.9 $ -- $ 843.7 $325.2 $31.6 $736.8 $ 61.9 $ 23.5 $ 26.2
======== ======= ======== ====== ===== ====== ======== ====== ======
Segment profit:
Operating income (loss) $ 323.8 $ -- $ 188.8 $ 82.8 $16.8 $ 24.0 $ 5.1 $ 4.7 $ 1.6
Income from equity investees 12.0 -- 0.8 -- -- -- 11.2 -- --
Interest expense (86.9) -- (62.8) (11.9) (1.6) -- (7.5) (2.7) (0.4)
Minority interests (64.3) -- (65.4) -- -- -- 1.1 -- --
-------- ------- -------- ------ ----- ------ -------- ------ ------
Income before income taxes $ 184.6 $ -- $ 61.4 $ 70.9 $15.2 $ 24.0 $ 9.9 $ 2.0 $ 1.2
======== ======= ======== ====== ===== ====== ======== ====== ======
Depreciation and amortization $ 94.3 $ -- $ 59.5 $ 14.6 $ 2.3 $ 3.0 $ 10.6 $ 3.5 $ 0.8
Partnership EBITDA (d) $ 247.3
Segment assets (at period end) $4,187.2 $(356.4) $1,525.2 $735.5 $88.1 $201.8 $1,430.2 $145.5 $417.3
======== ======= ======== ====== ===== ====== ======== ====== ======
Investments in equity investees
(at period end) $ 20.1 $ -- $ 3.6 $ -- $ -- $ 9.1 $ 4.6 $ 2.8 $ --
======== ======= ======== ====== ===== ====== ======== ====== ======
Goodwill and excess
reorganization value (at
period end) $1,174.8 $ -- $ 605.7 $ -- $ -- $ 2.8 $ 495.3 $ 65.7 $ 5.3
======== ======= ======== ====== ===== ====== ======== ====== ======
(a) International Propane-Other principally comprises FLAGA and our
joint-venture business in China.
(b) Corporate & Other's results principally comprise UGI Enterprises' HVAC/R
operations, net expenses of UGI's captive general liability insurance company
and UGI Corporation's unallocated corporate and general expenses and interest
income. Corporate & Other's assets principally comprise cash, short-term
investments and an intercompany loan. The intercompany interest associated with
the intercompany loan is removed in the segment presentation.
(c) International Propane-Antargaz' results for the nine months ended June 30,
2005 include $19.9 million of operating income and income before income taxes
due to the resolution of certain non-income tax contingencies effective as of
December 31, 2004 (see Note 9).
(d) The following table provides a reconciliation of Partnership EBITDA to
AmeriGas Propane operating income:
Nine months ended June 30, 2005 2004
- -------------------------- ------ ------
Partnership EBITDA (i) $208.0 $247.3
Depreciation and amortization (ii) (55.9) (59.4)
Minority interests (iii) 1.5 1.7
Income from equity investees -- (0.8)
Intercompany gain on sale of Atlantic Energy (9.1) --
Loss on extinguishment of debt 33.6 --
------ ------
Operating income $178.1 $188.8
====== ======
(i) Includes a $9.1 million gain on the sale of Atlantic Energy to Energy
Services during the nine months ended June 30, 2005.
(ii) Excludes General Partner depreciation and amortization of $0.1 million in
the nine months ended June 30, 2005 and 2004.
(iii) Principally represents the General Partner's 1.01% interest in AmeriGas
OLP.
-11-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
4. REDEMPTION OF $7.75 UGI UTILITIES SERIES PREFERRED STOCK
On October 1, 2004, UGI Utilities redeemed all 200,000 shares of the $7.75
UGI Utilities Series Preferred Stock at a price of $100 per share together
with full cumulative dividends. The redemption of the $7.75 UGI Utilities
Series Preferred Stock was funded with proceeds from the October 2004
issuance of $20 million of 6.13% Medium-Term Notes due October 2034.
5. LONG-TERM DEBT
In April 2005, the Partnership repaid $53.8 million of maturing AmeriGas
OLP First Mortgage Notes with the proceeds from a $35 million term loan due
October 1, 2006, borrowings under its revolving credit facility and
existing cash balances.
In May 2005, the Partnership refinanced $373.4 million of its outstanding
8.875% Senior Notes due 2011 through the issuance of $415 million of 7.25%
Senior Notes due 2015. In connection with the refinancing, UGI incurred an
after-tax loss on early extinguishment of debt of $9.4 million, which is
reflected in the condensed consolidated statements of income for the three
and nine months ended June 30, 2005.
In May 2005, UGI Utilities refinanced $20 million of its maturing 6.62%
Medium-Term Notes with the proceeds from the issuance of $20 million of
5.16% Medium-Term Notes due in May 2015.
6. INTANGIBLE ASSETS
The Company's intangible assets comprise the following:
June 30, September 30,
2005 2004
-------- -------------
Not subject to amortization:
Goodwill $1,140.6 $1,152.6
Excess reorganization value 93.3 93.3
-------- --------
$1,233.9 $1,245.9
-------- --------
Other intangible assets:
Customer relationships, noncompete
agreements and other $ 176.7 $ 169.7
Trademark (not subject to amortization) 41.1 42.2
-------- --------
Gross carrying amount 217.8 211.9
-------- --------
Accumulated amortization (41.4) (27.5)
-------- --------
Net carrying amount $ 176.4 $ 184.4
-------- --------
Changes in intangible assets during the nine months ended June 30, 2005
principally reflects the effects of foreign currency translation and
business acquisitions. Amortization expense of intangible assets was $4.2
million and $13.0 million for the three and nine months ended June 30,
2005, respectively, and $3.9 million and $7.1 million for the three and
nine months
-12-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
ended June 30, 2004, respectively. Our expected aggregate amortization
expense of intangible assets for the next five fiscal years is as follows:
Fiscal 2005 - $17.7 million; Fiscal 2006 - $17.3 million; Fiscal 2007 -
$16.6 million; Fiscal 2008 - $16.2 million; Fiscal 2009 - $14.9 million.
7. ENERGY SERVICES ACCOUNTS RECEIVABLE SECURITIZATION FACILITY
Energy Services has a $150 million receivables purchase facility
("Receivables Facility") with an issuer of receivables-backed commercial
paper expiring in August 2007, although the Receivables Facility may
terminate prior to such date due to the termination of the commitments of
the Receivables Facility's back-up purchasers. Under the Receivables
Facility, Energy Services transfers, on an ongoing basis and without
recourse, its trade accounts receivable to its wholly owned, special
purpose subsidiary, Energy Services Funding Corporation ("ESFC"), which is
consolidated for financial statement purposes. ESFC, in turn, has sold, and
subject to certain conditions, may from time to time sell, an undivided
interest in the receivables to a commercial paper conduit of a major bank.
The maximum level of funding available at any one time from this facility
is $150 million. The proceeds of these sales are less than the face amount
of the accounts receivable sold by an amount that approximates the
purchaser's financing cost of issuing its own receivables-backed commercial
paper. ESFC was created and has been structured to isolate its assets from
creditors of Energy Services and its affiliates, including UGI. This
two-step transaction is accounted for as a sale of receivables following
the provisions of SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Energy Services
continues to service, administer and collect trade receivables on behalf of
the commercial paper issuer and ESFC.
During the nine months ended June 30, 2005, Energy Services sold trade
receivables totaling $982.7 million to ESFC. During the nine months ended
June 30, 2005, ESFC sold an aggregate $387 million of undivided interests
in its trade receivables to the commercial paper conduit. At June 30, 2005,
the outstanding balance of ESFC trade receivables was $64.7 million, which
is net of $10 million that was sold to the commercial paper conduit and
removed from the balance sheet.
In addition, a major bank has committed to issue up to $50 million of
standby letters of credit, secured by cash or marketable securities ("LC
Facility"). At June 30, 2005, there were no letters of credit outstanding.
Energy Services expects to fund the collateral requirements with borrowings
under its Receivables Facility. The LC Facility expires in April 2006.
8. DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS
We sponsor a defined benefit pension plan ("UGI Utilities Pension Plan")
for employees of UGI, UGI Utilities, and certain of UGI's other wholly
owned subsidiaries. In addition, we provide postretirement health care
benefits to certain retirees and postretirement life insurance benefits to
nearly all domestic active and retired employees. Antargaz provides certain
pension and postretirement health care benefits for its employees.
-13-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
Net periodic pension expense and other postretirement benefit costs include
the following components:
Other
Pension Benefits Postretirement Benefits
------------------ -----------------------
Three Months Ended Three Months Ended
June 30, June 30,
------------------ -----------------------
2005 2004 2005 2004
----- ----- ----- -----
Service cost $ 1.4 $ 1.2 $ 0.1 $ --
Interest cost 3.5 3.2 0.5 0.4
Expected return on assets (4.5) (4.3) (0.1) (0.1)
Amortization of:
Transition (asset) obligation -- (0.3) 0.2 0.2
Prior service cost 0.2 0.2 -- --
Actuarial loss 0.3 0.3 0.1 0.1
----- ----- ----- -----
Net benefit cost 0.9 0.3 0.8 0.6
Change in regulatory assets and liabilities -- -- 0.2 0.3
----- ----- ----- -----
Net expense $ 0.9 $ 0.3 $ 1.0 $ 0.9
----- ----- ----- -----
Other
Pension Benefits Postretirement Benefits
----------------- -----------------------
Nine Months Ended Nine Months Ended
June 30, June 30,
----------------- -----------------------
2005 2004 2005 2004
------ ------ ----- -----
Service cost $ 4.2 $ 3.7 $ 0.3 $ 0.2
Interest cost 10.6 9.7 1.6 1.3
Expected return on assets (13.5) (13.0) (0.4) (0.4)
Amortization of:
Transition (asset) obligation -- (1.0) 0.7 0.7
Prior service cost 0.5 0.5 -- --
Actuarial loss 1.0 0.9 0.2 0.2
------ ------ ----- -----
Net benefit cost 2.8 0.8 2.4 2.0
Change in regulatory assets and liabilities -- -- 0.7 0.8
------ ------ ----- -----
Net expense $ 2.8 $ 0.8 $ 3.1 $ 2.8
------ ------ ----- -----
UGI Utilities Pension Plan assets are held in trust and consist principally
of equity and fixed income mutual funds. The Company does not believe it
will be required to make any contributions to the UGI Utilities Pension
Plan during the year ending September 30, 2005 for ERISA funding purposes.
Pursuant to orders previously issued by the PUC, UGI Utilities has
established a Voluntary Employees' Beneficiary Association ("VEBA") trust
to fund and pay UGI Utilities' postretirement health care and life
insurance benefits referred to above by depositing into the VEBA the annual
amount of postretirement benefit costs determined under SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
The difference between the annual amount calculated and the amount
included in UGI Utilities' rates is deferred for future recovery from, or
refund to, ratepayers. During the nine months ended June 30, 2005, UGI
Utilities contributed approximately $1.9 million to the VEBA and expects
to contribute approximately $2.3 million for the twelve months ended
September 30, 2005.
We also sponsor unfunded and non-qualified supplemental executive
retirement income plans. We recorded pre-tax expense for these plans of
$0.5 million and $0.4 million for the
-14-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
three months ended June 30, 2005 and 2004, respectively, and $1.3 million
and $1.2 million during the nine months ended June 30, 2005 and 2004,
respectively.
9. COMMITMENTS AND CONTINGENCIES
The Partnership has succeeded to certain lease guarantee obligations of
Petrolane relating to Petrolane's divestiture of non-propane operations
before its 1989 acquisition by QFB Partners. Future lease payments under
these leases total approximately $10 million at June 30, 2005. The leases
expire through 2010 and some of them are currently in default. The
Partnership has succeeded to the indemnity agreement of Petrolane by which
Texas Eastern Corporation ("Texas Eastern"), a prior owner of Petrolane,
agreed to indemnify Petrolane against any liabilities arising out of the
conduct of businesses that do not relate to, and are not a part of, the
propane business, including lease guarantees. In December 1999, Texas
Eastern filed for dissolution under the Delaware General Corporation Law.
PanEnergy Corporation ("PanEnergy"), Texas Eastern's sole stockholder,
assumed all of Texas Eastern's liabilities as of December 20, 2002, to the
extent of the value of Texas Eastern's assets transferred to PanEnergy as
of that date (which was estimated to exceed $94 million), and to the extent
that such liabilities arise within ten years from Texas Eastern's date of
dissolution. Notwithstanding the dissolution proceeding, and based on Texas
Eastern previously having satisfied directly defaulted lease obligations
without the Partnership's having to honor its guarantee, we believe that
the probability that the Partnership will be required to directly satisfy
the lease obligations subject to the indemnification agreement is remote.
On August 21, 2001, AmeriGas Partners, through AmeriGas OLP, acquired the
propane distribution businesses of Columbia Energy Group (the "2001
Acquisition") pursuant to the terms of a purchase agreement (the "2001
Acquisition Agreement") by and among Columbia Energy Group ("CEG"),
Columbia Propane Corporation ("Columbia Propane"), Columbia Propane, L.P.
("CPLP"), CP Holdings, Inc. ("CPH," and together with Columbia Propane and
CPLP, the "Company Parties"), AmeriGas Partners, AmeriGas OLP and the
General Partner (together with AmeriGas Partners and AmeriGas OLP, the
"Buyer Parties"). As a result of the 2001 Acquisition, AmeriGas OLP
acquired all of the stock of Columbia Propane and CPH and substantially all
of the partnership interests of CPLP. Under the terms of an earlier
acquisition agreement (the "1999 Acquisition Agreement"), the Company
Parties agreed to indemnify the former general partners of National Propane
Partners, L.P. (a predecessor company of the Columbia Propane businesses)
and an affiliate (collectively, "National General Partners") against
certain income tax and other losses that they may sustain as a result of
the 1999 acquisition by CPLP of National Propane Partners, L.P. (the "1999
Acquisition") or the operation of the business after the 1999 Acquisition
("National Claims"). At June 30, 2005, the potential amount payable under
this indemnity by the Company Parties was approximately $58 million. These
indemnity obligations will expire on the date that CPH acquires the
remaining outstanding partnership interest of CPLP, which is expected to
occur on or after July 19, 2009. Under the terms of the 2001 Acquisition
Agreement, CEG agreed to indemnify the Buyer Parties and the Company
Parties against any losses that they sustain under the 1999 Acquisition
Agreement and related agreements ("Losses"), including National Claims, to
the extent such claims are based on acts or
-15-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
omissions of CEG or the Company Parties prior to the 2001 Acquisition. The
Buyer Parties agreed to indemnify CEG against Losses, including National
Claims, to the extent such claims are based on acts or omissions of the
Buyer Parties or the Company Parties after the 2001 Acquisition. CEG and
the Buyer Parties have agreed to apportion certain losses resulting from
National Claims to the extent such losses result from the 2001 Acquisition
itself.
Samuel and Brenda Swiger and their son (the "Swigers") sustained personal
injuries and property damage as a result of a fire that occurred when
propane that leaked from an underground line ignited. In July 1998, the
Swigers filed a class action lawsuit against AmeriGas Propane, L.P. (named
incorrectly as "UGI/AmeriGas, Inc."), in the Circuit Court of Monongalia
County, West Virginia, in which they sought to recover an unspecified
amount of compensatory and punitive damages and attorney's fees, for
themselves and on behalf of persons in West Virginia for whom the
defendants had installed propane gas lines, allegedly resulting from the
defendants' failure to install underground propane lines at depths required
by applicable safety standards. In 2004, the court granted the plaintiffs'
motion to include customers acquired from Columbia Propane in August 2001
as additional potential class members and to amend their complaint to name
additional parties consistent with such ruling. In 2003, we settled the
individual personal injury and property damage claims of the Swigers. Class
counsel has indicated that the class is seeking compensatory damages in
excess of $12 million plus punitive damages, civil penalties and attorneys'
fees. We believe we have good defenses to the claims of the class members
and intend to vigorously defend against the remaining claims in this
lawsuit.
From the late 1800s through the mid-1900s, UGI Utilities and its former
subsidiaries owned and operated a number of manufactured gas plants
("MGPs") prior to the general availability of natural gas. Some
constituents of coal tars and other residues of the manufactured gas
process are today considered hazardous substances under the Superfund Law
and may be present on the sites of former MGPs. Between 1882 and 1953, UGI
Utilities owned the stock of subsidiary gas companies in Pennsylvania and
elsewhere and also operated the businesses of some gas companies under
agreement. Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, UGI Utilities divested all of its utility operations
other than those which now constitute Gas Utility and Electric Utility.
UGI Utilities does not expect its costs for investigation and remediation
of hazardous substances at Pennsylvania MGP sites to be material to its
results of operations because Gas Utility is currently permitted to include
in rates, through future base rate proceedings, prudently incurred
remediation costs associated with such sites. UGI Utilities has been
notified of several sites outside Pennsylvania on which private parties
allege MGPs were formerly owned or operated by it or owned or operated by
its former subsidiaries. Such parties are investigating the extent of
environmental contamination or performing environmental remediation. UGI
Utilities is currently litigating three claims against it relating to
out-of-state sites.
Management believes that under applicable law UGI Utilities should not be
liable in those instances in which a former subsidiary owned or operated an
MGP. There could be,
-16-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
however, significant future costs of an uncertain amount associated with
environmental damage caused by MGPs outside Pennsylvania that UGI Utilities
directly operated, or that were owned or operated by former subsidiaries of
UGI Utilities, if a court were to conclude that (1) the subsidiary's
separate corporate form should be disregarded or (2) UGI Utilities should
be considered to have been an operator because of its conduct with respect
to its subsidiary's MGP.
In April 2003, Citizens Communications Company ("Citizens") served a
complaint naming UGI Utilities as a third-party defendant in a civil action
pending in United States District Court for the District of Maine. In that
action, the plaintiff, City of Bangor, Maine ("City"), sued Citizens to
recover environmental response costs associated with MGP wastes generated
at a plant allegedly operated by Citizens' predecessors at a site on the
Penobscot River. Citizens subsequently joined UGI Utilities and ten other
third party defendants alleging that the third-party defendants are
responsible for an equitable share of costs Citizens may be required to pay
to the City for cleaning up tar deposits in the Penobscot River. The City
believes that it could cost as much as $50 million to clean up the river.
UGI Utilities believes that it has good defenses to the claim and is
defending the suit.
By letter dated July 29, 2003, Atlanta Gas Light Company ("AGL") served UGI
Utilities with a complaint filed in the United States District Court for
the Middle District of Florida in which AGL alleges that UGI Utilities is
responsible for 20% of approximately $8 million incurred by AGL in the
investigation and remediation of a former MGP site in St. Augustine,
Florida. UGI Utilities formerly owned stock of the St. Augustine Gas
Company, the owner and operator of the MGP. In March 2005, the court
granted UGI Utilities' motion for summary judgment dismissing AGL's
complaint. AGL has appealed.
AGL has informed UGI Utilities that it has begun remediation of MGP wastes
at a site owned by AGL in Savannah, Georgia. A former subsidiary of UGI
Utilities operated the MGP in the early 1900s. AGL believes that the total
cost of remediation could be as high as $55 million. AGL has not filed suit
against UGI Utilities for a share of these costs. UGI Utilities believes
that it will have good defenses to any action that may arise out of this
site.
On September 20, 2001, Consolidated Edison Company of New York ("ConEd")
filed suit against UGI Utilities in the United States District Court for
the Southern District of New York, seeking contribution from UGI Utilities
for an allocated share of response costs associated with investigating and
assessing gas plant related contamination at former MGP sites in
Westchester County, New York. The complaint alleges that UGI Utilities
"owned and operated" the MGPs prior to 1904. The complaint also seeks a
declaration that UGI Utilities is responsible for an allocated percentage
of future investigative and remedial costs at the sites. ConEd believes
that the cost of remediation for all of the sites could exceed $70 million.
By orders issued in November 2003 and March 2004, the court granted UGI
Utilities' motion for summary judgment and dismissed ConEd's complaint.
ConEd has appealed.
By letter dated June 24, 2004, KeySpan Energy ("KeySpan") informed UGI
Utilities that KeySpan has spent $2.3 million and expects to spend another
$11 million to clean up an
-17-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
MGP site it owns in Sag Harbor, New York. KeySpan believes that UGI
Utilities is responsible for approximately 50% of these costs as a result
of UGI Utilities' alleged direct ownership and operation of the plant from
1885 to 1902. UGI Utilities is in the process of reviewing the information
provided by KeySpan and is investigating this claim.
By letter dated August 5, 2004, Yankee Gas Services Company and Connecticut
Light and Power Company, subsidiaries of Northeast Utilities, (together,
the "Northeast Companies"), demanded contribution from UGI Utilities for
past and future remediation costs related to MGP operations on thirteen
sites owned by the Northeast Companies in nine cities in the State of
Connecticut. The Northeast Companies allege that UGI Utilities controlled
operations of the plants from 1883 to 1941. According to the letter,
investigation and remedial costs at the sites to date total approximately
$10 million and complete remediation costs for all sites could total $182
million. The Northeast Companies seek an unspecified fair and equitable
allocation of these costs to UGI Utilities. UGI Utilities is in the process
of reviewing the information provided by Northeast Companies and is
investigating this claim.
Antargaz filed suit against the French tax authorities in connection with
the assessment of non-income tax related to Antargaz owned tanks at
customer locations used to store LPG. Elf Antar France and Elf Aquitaine,
now Total France, former owners of Antargaz, agreed to indemnify Antargaz
for all payments which would have been due from Antargaz in respect of the
tax related to its tanks for the period from January 1, 1997 through
December 31, 2000. During June 2005, Antargaz was required to remit payment
to the French tax authorities with respect to this matter and Antargaz was
fully reimbursed pursuant to the indemnity agreement, which reduced the
amount indemnified to approximately E4.0 million ($4.8 million) at June 30,
2005. The indemnity from the former owners is reflected in "Prepaid and
other current assets" in the Condensed Consolidated Balance Sheet at June
30, 2005. Antargaz had recorded a liability for the tax relating to tanks
of various customer classes for the period from January 1, 1997 through
December 31, 2004 of approximately E29.9 million ($40.6 million). On
February 4, 2005, Antargaz received a letter from French authorities which
eliminated the requirement for Antargaz to provide taxes on Antargaz owned
tanks at certain customer locations. In addition, resolution was reached on
tax contingencies relating to a prior year. Therefore, effective December
31, 2004, Antargaz reversed (1) E8.8 million ($12.0 million) resulting from
the exemption of tanks at certain customer locations and (2) E5.9 million
($7.9 million) resulting from the resolution reached on a prior year's
taxes. The total pre-tax amount of $19.9 million is reflected in "Other
income, net" in the Condensed Consolidated Statement of Income for the nine
month period ended June 30, 2005. The after-tax effect of this reversal
resulted in $14.9 million of net income.
In addition to these matters, there are other pending claims and legal
actions arising in the normal course of our businesses. We cannot predict
with certainty the final results of environmental and other matters.
However, it is reasonably possible that some of them could be resolved
unfavorably to us. Although we currently believe, after consultation with
counsel, that damages or settlements, if any, recovered by the plaintiffs
in such claims or actions will not have a material adverse effect on our
financial position, damages or settlements could be material to our
operating results or cash flows in future periods
-18-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
depending on the nature and timing of future developments with respect to
these matters and the amounts of future operating results and cash flows.
At June 30, 2005, the Company's accrued liability for environmental
investigation and cleanup costs was not material.
10. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 154, "Accounting Changes and Error Corrections" ("SFAS 154"). SFAS 154
replaces APB No. 20, "Accounting Changes" and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements" and establishes
retrospective application as the required method for reporting a change in
accounting principle. SFAS 154 provides guidance for determining whether
retrospective application of a change in accounting principle is
impracticable and for reporting a change when retrospective application is
impracticable. SFAS 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). It requires an entity
to recognize a liability for a conditional asset retirement obligation when
incurred if the liability can be reasonably estimated. FIN 47 clarifies
that the term "Conditional Asset Retirement Obligation" refers to a legal
obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or
may not be within the control of the entity. FIN 47 also clarifies when an
entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 is effective no later than
the end of fiscal years ending after December 15, 2005. We are currently
evaluating the impact of FIN 47 on our financial position and results of
operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). SFAS 123R replaces SFAS 123 and supersedes APB 25.
SFAS 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions
with employees. However, SFAS 123 permitted entities the option of
continuing to apply the guidance in APB 25 as long as the footnotes to
financial statements disclosed what net income would have been had the
preferable fair-value-based method been used. SFAS 123R requires that the
compensation cost relating to share-based payment transactions be
recognized in the financial statements. The cost is required to be measured
based on the fair value of the equity or liability instruments issued. SFAS
123R covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans. SFAS 123R is
effective with our fiscal year ending September 30, 2006. Under all of the
transition methods, unrecognized compensation expense for awards that are
not vested on the adoption date will be recognized in the Company's
statements of income through the end of the requisite service period. We do
not believe that the adoption of SFAS 123R will have a material impact on
our results of operations or financial position. For disclosure regarding
pro forma net income and earnings per share as if we had determined
stock-based compensation under the fair value method prescribed by SFAS
123, see Note 1.
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UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions" ("SFAS 153"). SFAS 153 eliminates the exception from fair
value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions," and replaces it with an exception for exchanges that lack
commercial substance. SFAS 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS 153 is effective for
our interim period beginning after June 15, 2005. The adoption of SFAS 153
will not have a material effect on our financial position or results of
operations.
In December 2004, the FASB issued FASB Staff Position 109-1, "Application
of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" ("FSP 109-1") and FASB Staff Position 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision Within the American Jobs Creation Act of 2004" ("FSP 109-2"). The
American Jobs Creations Act provides deductions for qualified domestic
production activities and repatriation of foreign earnings. FSP 109-1 and
FSP 109-2 did not have a material impact on our financial position or
results of operations.
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UGI CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Information contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Quarterly Report may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such statements use forward-looking words such as "believe," "plan,"
"anticipate," "continue," "estimate," "expect," "may," "will," or other similar
words. These statements discuss plans, strategies, events or developments that
we expect or anticipate will or may occur in the future.
A forward-looking statement may include a statement of the assumptions or bases
underlying the forward-looking statement. We believe that we have chosen these
assumptions or bases in good faith and that they are reasonable. However, we
caution you that actual results almost always vary from assumed facts or bases,
and the differences between actual results and assumed facts or bases can be
material, depending on the circumstances. When considering forward-looking
statements, you should keep in mind the following important factors which could
affect our future results and could cause those results to differ materially
from those expressed in our forward-looking statements: (1) adverse weather
conditions resulting in reduced demand; (2) cost volatility and availability of
propane and other liquefied petroleum gases ("LPG"), oil, electricity, coal and
natural gas and the capacity to transport product to our market areas; (3)
changes in domestic and foreign laws and regulations, including safety, tax and
accounting matters; (4) competitive pressures from the same and alternative
energy sources; (5) failure to acquire new customers thereby reducing or
limiting any increase in revenues; (6) liability for environmental claims; (7)
customer conservation measures and improvements in energy efficiency and
technology resulting in reduced demand; (8) adverse labor relations; (9) large
customer, counterparty or supplier defaults; (10) liability in excess of
insurance coverage for personal injury and property damage arising from
explosions and other catastrophic events, including acts of terrorism, resulting
from operating hazards and risks incidental to generating and distributing
electricity and transporting, storing and distributing natural gas, propane and
LPG; (11) political, regulatory and economic conditions in the United States and
in foreign countries; (12) interest rate fluctuations and other capital market
conditions, including foreign currency rate fluctuations; (13) reduced
distributions from subsidiaries; and (14) the timing and success of the
Company's efforts to develop new business opportunities.
These factors are not necessarily all of the important factors that could cause
actual results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable factors could also
have material adverse effects on future results. We undertake no obligation to
update publicly any forward-looking statement whether as a result of new
information or future events except as required by federal securities laws.
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UGI CORPORATION AND SUBSIDIARIES
ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare our results of operations for (1) the three
months ended June 30, 2005 ("2005 three-month period") with the three months
ended June 30, 2004 ("2004 three-month period") and (2) the nine months ended
June 30, 2005 ("2005 nine-month period") with the nine months ended June 30,
2004 ("2004 nine-month period"). Our analyses of results of operations should be
read in conjunction with the segment information included in Note 3 to the
Condensed Consolidated Financial Statements.
EXECUTIVE OVERVIEW
Our Company's results are largely seasonal and dependent upon weather
conditions, particularly during the peak-heating season, which occurs in the
first half of our fiscal year. As a result, our net income is generally higher
in our first and second fiscal quarters whereas lower net income or net losses
occur in our third and fourth fiscal quarters. In addition to weather
conditions, higher prices for energy commodities that we distribute causes
increased customer conservation.
With the exception of AmeriGas Propane, all of our businesses contributed higher
net income in the 2005 nine-month period than in the 2004 nine-month period. The
approximate 72% increase in net income in the 2005 nine-month period reflects
Antargaz' results for a full winter-heating season. AmeriGas Propane's
performance reflects (1) a $9.4 million after-tax loss ($0.09 per diluted share)
on early extinguishment of debt as a result of a refinancing, (2) the effects of
customer conservation due to high-energy prices and (3) the effects of warmer
than normal winter weather. The increase in net income attributed to Antargaz
reflects $14.9 million in net income ($0.14 per diluted share) resulting from
the resolution of certain non-income tax contingencies, a loss of $9.1 million
recorded in the 2004 nine-month period on the settlement of contracts for the
forward purchase of euros used to fund the Antargaz Acquisition and continued
unusually high LPG margin per gallon.
In May 2005, the Partnership refinanced $373.4 million of its 8.875% Senior
Notes due 2011 with $415 million of 7.25% Senior Notes due 2015 resulting in a
loss on early extinguishment of debt.
NET INCOME (LOSS) BY BUSINESS UNIT:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2005 2004 2005 2004
------ ----- ------ ------
(millions of dollars)
Net income (loss):
AmeriGas Propane (a) $(14.5) $(7.0) $ 22.9 $ 36.7
International Propane 6.4 4.1 100.6 11.8
Gas Utility 2.3 1.3 43.5 42.1
Electric Utility 2.7 3.2 9.1 9.0
Energy Services 6.3 6.0 18.2 14.0
Corporate & Other (2.5) 0.7 1.9 0.6
------ ----- ------ ------
Total net income $ 0.7 $ 8.3 $196.2 $114.2
------ ----- ------ ------
(a) Amounts are net of minority interests in AmeriGas Partners, L.P.
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UGI CORPORATION AND SUBSIDIARIES
2005 THREE-MONTH PERIOD COMPARED WITH 2004 THREE-MONTH PERIOD
Increase
Three months ended June 30, 2005 2004 (Decrease)
- ------------------------------------------------------- ------ ------ ---------------
(Millions of dollars)
AMERIGAS PROPANE:
Revenues $349.5 $315.1 $ 34.4 10.9%
Total margin (a) $140.5 $131.1 $ 9.4 7.2%
Partnership EBITDA (b) $(13.7) $ 16.1 $(29.8) (185.1)%
Operating income (loss) $ 1.6 $ (4.0) $ 5.6 140.0%
Retail gallons sold (millions) 181.9 175.2 6.7 3.8%
Degree days - % warmer than normal (c) (4.9)% (8.0)% -- --
INTERNATIONAL PROPANE:
Revenues $163.1 $156.8 $ 6.3 4.0%
Total margin (a) $ 92.4 $ 88.3 $ 4.1 4.6%
Operating income $ 13.2 $ 14.3 $ (1.1) (7.7)%
Loss from equity investees $ (0.7) $ (0.7) $ -- 0.0%
Income before income taxes $ 4.8 $ 6.4 $ (1.6) (25.0)%
GAS UTILITY:
Revenues $ 89.5 $ 97.7 $ (8.2) (8.4)%
Total margin (a) $ 34.9 $ 32.6 $ 2.3 7.1%
Operating income $ 7.7 $ 6.9 $ 0.8 11.6%
Income before income taxes $ 3.8 $ 3.0 $ 0.8 26.7%
System throughput - billions of cubic feet ("bcf") 15.3 15.5 (0.2) (1.3)%
Degree days - % warmer than normal (6.4)% (18.7)% -- --
ELECTRIC UTILITY:
Revenues $ 22.0 $ 21.0 $ 1.0 4.8%
Total margin (a) $ 10.2 $ 10.3 $ (0.1) (1.0)%
Operating income $ 4.9 $ 5.5 $ (0.6) (10.9)%
Income before income taxes $ 4.4 $ 4.9 $ (0.5) (10.2)%
Distribution sales - millions of kilowatt hours ("gwh") 222.5 221.5 1.0 0.5%
ENERGY SERVICES:
Revenues $290.6 $217.3 $ 73.3 33.7%
Total margin (a) $ 18.7 $ 16.5 $ 2.2 13.3%
Operating income $ 10.6 $ 10.2 $ 0.4 3.9%
Income before income taxes $ 10.6 $ 10.2 $ 0.4 3.9%
(a) Total margin represents total revenues less total cost of sales and, with
respect to Electric Utility, revenue-related taxes, i.e. Electric Utility
gross receipts taxes, of $1.2 million and $1.1 million in three-month
periods ended June 30, 2005 and 2004, respectively. For financial statement
purposes, revenue-related taxes are included in "Utility taxes other than
income taxes" on the Condensed Consolidated Statements of Income.
(b) Partnership EBITDA (earnings before interest expense, income taxes and
depreciation and amortization) should not be considered as an alternative
to net income (as an indicator of operating performance) or as an
alternative to cash flow (as a measure of liquidity or ability to service
debt obligations) and is not a measure of performance or financial
condition under accounting principles generally accepted in the United
States of America. Management uses Partnership EBITDA as the primary
measure of segment profitability for the AmeriGas Propane segment (see Note
3 to the Condensed Consolidated Financial Statements).
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UGI CORPORATION AND SUBSIDIARIES
(c) Deviation from average heating degree-days based upon national weather
statistics provided by the National Oceanic and Atmospheric Administration
("NOAA") for 335 airports in the United States, excluding Alaska.
AMERIGAS PROPANE. Based upon national heating degree-day data, temperatures were
4.9% warmer than normal during the 2005 three-month period compared to
temperatures that were 8.0% warmer than normal during the 2004 three-month
period. Retail propane volumes sold increased 3.8% which reflects the effects of
recent acquisitions on volumes sold and significantly colder weather in May than
in the prior year. In the 2005 three-month period, our average retail propane
product costs were approximately 32% higher than in the 2004 three-month period,
which resulted in higher year-over-year prices to our customers. These higher
prices resulted in customer conservation which limited the increase in volumes
sold. Low-margin wholesale propane volumes sold decreased during the 2005
three-month period reflecting lower volumes sold in connection with product cost
management activities.
Retail propane revenues increased $50.0 million reflecting a $40.4 million
increase due to higher average selling prices and a $9.6 million increase due to
the higher retail volumes sold. Wholesale propane revenues decreased $16.5
million reflecting a $22.5 million decrease due to lower volumes sold partially
offset by a $6.0 million increase resulting from higher average selling prices.
The higher average retail and wholesale selling prices per gallon reflect the
continuance of significantly higher propane product costs compared to the prior
year. The average wholesale cost per gallon of propane at Mont Belvieu, one of
the major propane supply points in the United States, was approximately 26%
greater than the average cost per gallon during the 2004 three-month period.
Total cost of sales increased $25.0 million reflecting the increase in propane
product costs and, to a much lesser extent, the increased volumes sold. Total
margin increased $9.4 million compared to the 2004 three-month period reflecting
higher retail volumes sold, slightly higher average retail propane margins per
gallon and higher margin from ancillary sales and services.
Partnership EBITDA during the 2005 three-month period was $(13.7) million
compared to $16.1 million during the 2004 three-month period. The $29.8 million
decline in Partnership EBITDA reflects a $33.6 million loss on early
extinguishment of debt resulting from the Partnership's refinancing of $373.4
million of its Senior Notes in May 2005 and increased operating and
administrative expenses which were partially offset by the previously mentioned
increase in total margin. Operating and administrative expenses increased $6.6
million principally reflecting higher performance-based compensation and
benefits costs, general insurance expense, vehicle fuel expense and vehicle
lease expense. Operating income increased $5.6 million reflecting the increase
in total margin, a decrease in depreciation expense and increased other income
largely offset by the previously mentioned increases in operating and
administrative expenses. The $1.1 million increase in other income primarily
reflects increased gains from fixed asset disposals.
INTERNATIONAL PROPANE.
Weather in Antargaz' service territory was approximately 20% warmer than normal
compared to 8% warmer than normal in the 2004 three-month period. FLAGA
experienced a similar weather pattern as Antargaz. During the 2005 three-month
period the monthly average currency translation rate was 1.26 dollars per euro
compared to 1.21 dollars per euro in the 2004 three-month period. Antargaz'
retail LPG volumes sold decreased to 59.2 million gallons from 66.3 million
gallons in the 2004 three-month period due in large part to the warmer weather.
Despite the decline in Antargaz' retail volumes sold, International Propane
revenues increased 4.0% reflecting the favorable currency translation effects of
a stronger euro and, to a lesser extent, an approximate 10% increase in LPG
gallons sold by FLAGA. Total margin increased $4.1 million in the 2005
three-month period reflecting slightly higher base-currency margin generated by
Antargaz and FLAGA and the beneficial currency translation effects of a
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UGI CORPORATION AND SUBSIDIARIES
stronger euro versus the dollar. Antargaz continued to experience higher than
normal margins per gallon of LPG during the 2005 three-month period compensating
for its decrease in LPG volumes sold.
International Propane operating income declined $1.1 million in the 2005
three-month period principally reflecting the unfavorable currency translation
effects of a stronger euro versus the dollar on Antargaz' slightly higher
base-currency operating expenses and decreased other income which were partially
offset by the increase in total margin and improved operating income from FLAGA.
Income before income taxes reflects the decline in operating income and lower
losses allocated to Antargaz' minority interests.
GAS UTILITY. Although weather in Gas Utility's service territory based upon
heating degree-days was 6.4% warmer than normal during the 2005 three-month
period, weather was 15.1% colder than the prior-year three-month period.
Notwithstanding the colder 2005 three-month period weather and year-over-year
growth in the number of our customers, total distribution system throughput
decreased slightly as slightly higher sales to firm- residential, commercial and
industrial ("retail core-market") customers were more than offset by lower
volumes transported for firm and interruptible delivery service customers.
Although sales to retail core-market customers increased, persistently high
natural gas prices resulted in price-induced customer conservation. The $8.2
million decrease in Gas Utility revenues during the 2005 three-month period
reflects a $15.6 million decrease in revenues from low-margin off-system sales
partially offset principally by higher retail core-market revenues reflecting
the effects of higher average purchased gas cost ("PGC") rates and the
previously mentioned higher retail core-market volumes. Gas Utility's cost of
gas was $54.6 million in the 2005 three-month period compared to $65.1 million
in the 2004 three-month period reflecting the impact of the previously mentioned
lower off-system sales partially offset by higher retail core-market purchased
gas costs. Gas Utility total margin in the 2005 three-month period increased
$2.3 million reflecting higher average unit margins from interruptible customers
and increased retail core-market margin resulting from the higher sales.
Gas Utility operating income increased to $7.7 million in the 2005 three-month
period from $6.9 million in the 2004 three-month period principally reflecting
the $2.3 million increase in total margin and a $0.8 million increase in other
income partially offset by higher operating and administrative costs and greater
depreciation expense. Total operating and administrative expenses were $1.9
million higher than the prior year period principally reflecting higher
employee-related expenses including higher incentive compensation costs. The
increase in Gas Utility income before income taxes reflects the previously
mentioned increase in operating income.
ELECTRIC UTILITY. Electric Utility's 2005 three-month period kilowatt-hour sales
were essentially equal with the prior-year period. Electric Utility revenues
increased $1.0 million in the 2005 three-month period reflecting an increase in
its Provider of Last Resort ("POLR") electric generation rates effective January
1, 2005. Electric Utility's cost of sales increased $1.0 million as a result of
higher per-unit purchased power costs.
Electric Utility total margin in the 2005 three-month period was comparable to
the 2004 three-month period as the increase in POLR electric generation revenues
was substantially offset by the increase in purchased power costs.
Operating income and income before income taxes were lower in the 2005
three-month period primarily reflecting higher operating and administrative
expenses and greater depreciation expense.
ENERGY SERVICES. Energy Services revenues increased $73.3 million in the 2005
three-month period reflecting (1) approximately $64 million resulting from
increased natural gas prices which was partially offset by a 3% decrease in
natural gas volumes sold by Energy Services' gas marketing business, (2)
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UGI CORPORATION AND SUBSIDIARIES
approximately $11 million in revenues generated by Atlantic Energy Inc.
("Atlantic Energy"), which was acquired by Energy Services in November 2004 and
(3) $3.1 million higher revenues from UGID's electric generation business.
Atlantic Energy, the owner of a 20 million gallon propane storage terminal
located in Chesapeake, Virginia, was purchased through two separate transactions
with ConocoPhillips Company and AmeriGas Propane. See Note 2 to Condensed
Consolidated Financial Statements for additional information regarding the
acquisition. Total margin increased $2.2 million in the 2005 three-month period
compared to the prior-year three-month period. The increase in total margin is
attributed to (1) higher margin from UGID than in the prior-year period (2) the
absence of margin from Atlantic Energy operations in the 2004 three-month
period, and (3) slightly higher average natural gas unit margins. Both the
increased revenues and margin from UGID's electric generation business are
attributed to lower margin generated in the prior year resulting from a
scheduled maintenance outage at an electric generation plant.
The increase in Energy Services income before income taxes principally reflects
the previously mentioned increase in total margin partially offset by higher
operating and administrative expenses primarily attributed to higher
uncollectible accounts expense and the inclusion of operating and administrative
expenses of Atlantic Energy. Partially offsetting the increase, UGID incurred
lower plant maintenance expenses associated with a scheduled outage that
occurred in the prior-year three-month period.
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UGI CORPORATION AND SUBSIDIARIES
2005 NINE-MONTH PERIOD COMPARED WITH 2004 NINE-MONTH PERIOD
Increase
Nine months ended June 30, 2005 2004 (Decrease)
- -------------------------- -------- -------- --------------
(Millions of dollars)
AMERIGAS PROPANE:
Revenues $1,604.0 $1,463.0 $141.0 9.6%
Total margin (a) $ 614.1 $ 619.3 $ (5.2) (0.8)%
Partnership EBITDA $ 208.0 $ 247.3 $(39.3) (15.9)%
Operating income $ 178.1 $ 188.8 $(10.7) (5.7)%
Retail gallons sold (millions) 857.5 883.6 (26.1) (3.0)%
Degree days - % warmer
than normal (6.1)% (4.6)% -- --
INTERNATIONAL PROPANE:
Revenues $ 804.4 $ 191.2 $613.2 N.M.
Total margin (a) $ 425.3 $ 105.8 $319.5 N.M.
Operating income (loss) $ 189.6 $ 9.8 $179.8 N.M.
(Loss) income from equity investees $ (2.0) $ 11.2 $(13.2) N.M.
Income before income taxes $ 162.3 $ 9.7 $152.6 N.M.
GAS UTILITY:
Revenues $ 506.6 $ 490.5 $ 16.1 3.3%
Total margin (a) $ 168.1 $ 165.3 $ 2.8 1.7%
Operating income $ 84.4 $ 82.8 $ 1.6 1.9%
Income before income taxes $ 72.4 $ 70.9 $ 1.5 2.1%
System throughput -
billions of cubic feet ("bcf") 69.2 70.0 (0.8) (1.1)%
Degree days - % colder (warmer)
than normal 0.0% (2.0)% -- --
ELECTRIC UTILITY:
Revenues $ 69.9 $ 67.1 $ 2.8 4.2%
Total margin (a) $ 32.5 $ 31.9 $ 0.6 1.9%
Operating income $ 16.8 $ 16.8 $ -- 0.0%
Income before income taxes $ 15.3 $ 15.2 $ 0.1 0.7%
Distribution sales - millions of
kilowatt hours ("gwh") 753.7 747.2 6.5 0.9%
ENERGY SERVICES:
Revenues $1,051.8 $ 779.0 $272.8 35.0%
Total margin (a) $ 56.8 $ 42.2 $ 14.6 34.6%
Operating income $ 30.7 $ 24.0 $ 6.7 27.9%
Income before income taxes $ 30.7 $ 24.0 $ 6.7 27.9%
N.M. - not meaningful
(a) Total margin represents total revenues less total cost of sales and, with
respect to Electric Utility, revenue-related taxes, i.e. Electric Utility
gross receipts taxes, of $3.9 million in the 2005 nine-month period and
$3.6 million in the 2004 nine-month period. For financial statement
purposes, revenue-related taxes are included in "Utility taxes other than
income taxes" on the Condensed Consolidated Statements of Income.
AMERIGAS PROPANE. Temperatures during the 2005 nine-month period were 6.1%
warmer than normal compared to temperatures that were 4.6% warmer than normal
during the 2004 nine-month period. Retail propane volumes sold decreased 3%
principally due to the warmer than normal winter weather and the negative
effects of customer conservation on volumes sold which is primarily attributable
to increased
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UGI CORPORATION AND SUBSIDIARIES
propane selling prices. Low-margin wholesale propane volumes sold decreased
during the 2005 nine-month period reflecting lower volumes sold in connection
with product cost management activities.
Retail propane revenues increased $162.2 million reflecting a $198.3 million
increase due to higher average selling prices partially offset by a $36.1
million decrease due to the lower retail volumes sold. Wholesale propane
revenues decreased $24.9 million reflecting a $53.3 million decrease due to
lower volumes sold partially offset by a $28.4 million increase due to higher
average selling prices. The higher average retail and wholesale selling prices
per gallon reflect significantly higher propane product costs. The average
wholesale cost per gallon of propane at Mont Belvieu was approximately 29%
greater than the average cost per gallon during the 2004 nine-month period.
Total cost of sales increased $146.2 million reflecting the higher propane
product costs. Total margin decreased $5.2 million principally due to the lower
retail volumes sold partially offset by slightly higher average retail propane
margins per gallon and higher margin from ancillary sales and services.
Notwithstanding a $9.1 million pre-tax gain recognized on the Partnership's sale
of its 50% ownership interest in Atlantic Energy, Inc. ("Atlantic Energy"),
Partnership EBITDA during the 2005 nine-month period decreased $39.3 million
compared to the 2004 nine-month period as a result of the $33.6 million loss on
early extinguishment of debt resulting from the Partnership's refinancing of its
Senior Notes in May 2005, an $11.1 million increase in operating and
administrative expenses and the decrease in total margin. The increase in
operating and administrative expenses principally resulted from higher vehicle
fuel expense, vehicle lease costs and general insurance expense. Operating
income decreased $10.7 million reflecting the decrease in total margin and
increased operating and administrative expenses partially offset by lower
depreciation expense.
INTERNATIONAL PROPANE. International Propane results of operations in the 2005
nine-month period significantly increased compared to the 2004 nine-month period
as a result of the March 31, 2004 Antargaz Acquisition. The 2005 nine-month
period includes Antargaz' results for a full peak-heating season. Antargaz'
revenues, margin and operating income during the 2005 nine-month period were
$747.1 million, $400.9 million and $184.4 million, respectively, which includes
$19.9 million in operating income resulting from the resolution of certain
non-income tax contingencies. Antargaz sold approximately 290 million retail
gallons of LPG during the 2005 nine-month period compared to approximately 286
million retail gallons during the 2004 nine-month period. Weather across
Antargaz' service territory in the 2005 nine-month period was approximately 3%
warmer than normal and comparable to weather in the prior-year period.
The increase in International Propane revenues reflects revenues from Antargaz
and a $10.2 million increase in FLAGA's revenues. The increase in FLAGA's
revenues is primarily attributed to (1) a 10% increase in LPG volumes sold, due
in part to customer growth in the cylinder business largely resulting from the
acquisition of the Czech business of BP PLC in the fourth quarter of our 2004
fiscal year, (2) higher LPG prices and (3) the effects of a stronger euro. The
increase in total margin is a result of (1) margin generated from Antargaz'
operations and (2) an increase FLAGA's total margin reflecting the translation
effects of the stronger euro which were partially offset by decreased average
LPG margins per gallon. Antargaz continued to benefit from high margins per
gallon of LPG primarily reflecting the effects of declining LPG costs during
much of the fiscal 2005 heating season. Antargaz' LPG purchases are principally
denominated in U.S. dollars. Accordingly, its LPG costs declined during this
period due to the strengthening euro versus the dollar. Based upon average
historical margins, management estimates the positive effect of Antargaz' high
margins on our net income during the 2005 nine-month period to be within a range
of $10 million to $15 million. The euro was translated at a monthly average
exchange rate of 1.29 dollars per euro during the 2005 nine-month period.
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UGI CORPORATION AND SUBSIDIARIES
The $179.8 million increase in International Propane operating income primarily
reflects Antargaz' operating income for the 2005 nine-month period.
International Propane operating income benefited from Antargaz' reversal of
$19.9 million in non-income tax reserves due to resolution of certain
contingencies. See Antargaz Tax Matter section below. In addition, the increase
in operating income reflects a prior-period loss of $9.1 million on the
settlement of contracts for the forward purchase of euros used to fund the
Antargaz Acquisition.
Income from equity investees declined in the 2005 nine-month period primarily
due to the absence of equity income from our 19.5% equity investment in AGZ
Holding as a result of the Antargaz Acquisition and, to a lesser extent,
Antargaz' equity investee losses.
The increase in International Propane income before income taxes principally
reflects Antargaz' operating income for the 2005 nine-month period and the
previously mentioned prior-period loss on the forward purchase contracts
partially offset by higher interest expense associated with the Antargaz
Acquisition and the decrease in equity investee income.
GAS UTILITY. Weather in Gas Utility's service territory during the 2005
nine-month period was approximately normal compared with weather that was 2.0%
warmer than normal in the 2004 nine-month period. Notwithstanding the slightly
colder weather and year-over-year customer growth, total distribution system
throughput decreased 0.8 bcf or 1.1% as persistently high natural gas prices
resulted in price-induced customer conservation principally in our retail
core-market. During the quarter ended June 30, 2005, the Company revised its
heating degree day statistics for the first and second fiscal quarters of 2005
due to a measurement error caused by an equipment malfunction. On an adjusted
basis, weather was 3.0% warmer than normal during the three months ended
December 31, 2004 (versus 0.5% colder than normal as previously reported), and
3.6% colder than normal during the three months ended March 31, 2005 (versus
5.7% colder than normal as previously reported). For the six months ended March
31, 2005, weather was 0.9% colder than normal (versus 3.6% colder than normal as
previously reported). The adjusted statistics did not have an effect on the
Company's results of operations or the discussion of those results included in
the Company's "Management's Discussion and Analysis of Results of Operations"
for the periods described above, other than to lessen the estimated effects of
price-induced conservation on throughput from our retail core-market customers
for all the periods affected. The decrease in retail core-market throughput
during the 2005 nine-month period was partially offset by higher interruptible
delivery service volumes. The increase in Gas Utility revenues during the 2005
nine-month period principally is a result of a $52.4 million increase in retail
core-market revenues and higher revenues from interruptible customers partially
offset by a $40.6 million decrease in revenues from low-margin off-system sales.
The increase in retail core-market revenues reflects higher average PGC rates.
Gas Utility's cost of gas was $338.5 million in the 2005 nine-month period
compared to $325.2 million in the 2004 nine-month period reflecting the effects
of the higher average PGC rates partially offset by the effects on cost of sales
from the lower off-system sales.
The $2.8 million increase in Gas Utility total margin principally reflects
greater margin generated from the higher interruptible delivery service volumes
and higher average interruptible delivery service unit margins. The increased
interruptible unit margins reflect an increase in the spread between prices for
natural gas and alternative fuels, principally oil.
Gas Utility operating income increased $1.6 million during the 2005 nine-month
period as the previously mentioned $2.8 million increase in total margin and a
$2.9 million increase in other income were partially offset by higher operating
and administrative costs and a $0.9 million increase in depreciation expense.
Other income increased due in large part to the absence of costs recorded in the
prior-year nine-month period related to settling a regulatory claim resulting
from the discontinuance of
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UGI CORPORATION AND SUBSIDIARIES
natural gas service to certain customers and higher other non-tariff income.
Operating and administrative expenses increased $3.3 million in the 2005
nine-month period principally reflecting higher employee compensation and
benefits expense including greater incentive compensation expenses, the absence
of environmental insurance settlements received in the prior-year period and
greater uncollectible accounts expense. These increases in expenses were
partially offset by lower required provisions for injuries and damages claims.
The increase in Gas Utility income before income taxes principally reflects the
increase in operating income partially offset by the effects of slightly higher
interest expense.
ELECTRIC UTILITY. Electric Utility's 2005 nine-month period kilowatt-hour sales
were slightly higher than the prior-year period on weather that was slightly
colder than the prior year. The increase in Electric Utility revenues
principally reflects higher POLR rates. Electric Utility's cost of sales
increased $1.9 million reflecting higher per-unit purchased power costs and, to
a lesser extent, the higher kilowatt-hour sales.
Electric Utility total margin in the 2005 nine-month period increased $0.6
million principally as a result of the previously mentioned increase in POLR
rates and the slight increase in kilowatt-hour sales partially offset by the
higher purchased power costs. Operating income and income before income taxes in
the 2005 nine-month period were comparable with the prior-year reflecting the
previously mentioned increase in total margin offset by increased operating and
administrative expenses, most notably related to increased distribution system
maintenance.
ENERGY SERVICES. The $272.8 million increase in Energy Services revenues in the
2005 nine-month period resulted primarily from (1) increased natural gas prices
and to a lesser extent an approximate 3% growth in natural gas volumes sold, (2)
approximately $56 million of revenues generated by Atlantic Energy and (3) $4.9
million of increased revenues from electric generation. The increase in UGID's
electric generation revenues largely reflects the reduced electricity generated
in the 2004 nine-month period resulting from a scheduled plant maintenance
outage. Total margin from Energy Services' gas marketing business increased by
$8.5 million in the 2005 nine-month period principally due to higher average
natural gas unit margins. Atlantic Energy contributed $5.0 million to the total
increase in margin with the remaining increase contributed by UGID. Energy
Services' higher average natural gas unit margins reflect the lower proportion
of annual fixed-price customer contracts and more seasonal fixed-price customer
contracts compared to the prior-year period. Under the annual fixed-price
customer contracts, customers pay an average fixed price for the natural gas
they purchase throughout the year. Although the total margin to be earned over
the terms of these contracts remains unchanged, margin realization is seasonal
because gas costs are usually higher, and unit margins lower, during the peak
heating season months of late fall and winter, while gas costs are usually
lower, and unit margins higher, during the late spring and summer months.
The increase in Energy Services operating income and income before income taxes
principally reflects the previously mentioned increase in total margin partially
offset by higher operating and administrative expenses and higher depreciation
and amortization. The higher operating and administrative expenses were
primarily a result of higher uncollectible accounts expense and operating and
administrative expenses associated with Atlantic Energy since its acquisition in
November 2004.
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UGI CORPORATION AND SUBSIDIARIES
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
Our cash, cash equivalents and short-term investments totaled $272.4 million at
June 30, 2005 compared with $199.6 million at September 30, 2004. These amounts
include $129.4 million and $114.6 million, respectively, of cash, cash
equivalents and short-term investments available to UGI.
The Company's long-term debt outstanding at June 30, 2005 totaled $1,667.3
million (including current maturities of $208.7 million) compared to $1,670.1
million of long-term debt (including current maturities of $122.8 million) at
September 30, 2004. In April 2005, the Partnership repaid $53.8 million of
maturing AmeriGas OLP First Mortgage Notes with the proceeds from a $35 million
term loan ("AmeriGas OLP Term Loan"), borrowings under its revolving credit
facility and existing cash balances. In May 2005, the Partnership refinanced
$373.4 million of its outstanding 8.875% Senior Notes due 2011 through the
issuance of $415 million of 7.25% Senior Notes due 2015. In connection with the
refinancing, UGI incurred an after-tax loss on early extinguishment of debt
totaling $9.4 million. In addition, UGI Utilities refinanced $20 million of its
6.62% Medium-Term Notes due in May 2005 with the issuance of $20 million of
5.16% Medium-Term Notes due in May 2015. UGI Utilities expects to refinance the
$50 million of Medium-Term Notes due in December 2005 with new Medium-Term
Notes.
AmeriGas OLP's Credit Agreement expires on October 15, 2008 and consists of (1)
a $100 million Revolving Credit Facility and (2) a $75 million Acquisition
Facility. The Revolving Credit Facility may be used for working capital and
general purposes of AmeriGas OLP. The Acquisition Facility provides AmeriGas OLP
with the ability to borrow up to $75 million to finance the purchase of propane
businesses or propane business assets or, to the extent it is not so used, for
working capital and general purposes, subject to restrictions in the AmeriGas
Partners Senior Notes indentures. At June 30, 2005, there were $15 million of
borrowings under the Credit Agreement, which are classified as bank loans on the
Condensed Consolidated Balance Sheets. Issued and outstanding letters of credit
under the Revolving Credit Facility, which reduce the amount available for
borrowings, totaled $57.8 million at June 30, 2005. AmeriGas OLP's short-term
borrowing needs are seasonal and are typically greatest during the fall and
winter heating-season months due to the need to fund higher levels of working
capital.
AmeriGas Partners periodically issues debt and equity securities and expects to
continue issuing securities in the future. It has issued debt securities and
common units in underwritten public offerings in each of the last three fiscal
years, and if market conditions are acceptable, it may issue common units in the
near future. Most recently, it has issued debt securities through a private
placement in May 2005 and common units in May 2004 in an underwritten public
offering. The Partnership has effective debt and equity shelf registration
statements with the U.S. Securities and Exchange Commission ("SEC") under which
it may issue up to an additional (1) 1.4 million AmeriGas Partners Common Units
and (2) up to $446.2 million of debt or equity securities pursuant to an
unallocated shelf registration statement.
Antargaz has a variable interest rate Senior Facilities Agreement consisting of
a euro-denominated term loan and a E50 million revolver which expires June 2008.
At June 30, 2005, there were no borrowings outstanding under the revolver.
UGI Utilities has revolving credit commitments under which it may borrow up to a
total of $110 million. These agreements expire in June 2007 and June 2008. At
June 30, 2005, UGI Utilities had $49.5 million in borrowings outstanding under
these revolving credit agreements. Short-term borrowings, including borrowings
under revolving credit agreements are classified as bank loans on the Condensed
Consolidated
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UGI CORPORATION AND SUBSIDIARIES
Balance Sheets. UGI Utilities filed a shelf registration statement with the SEC
covering a total of $125 million of debt securities. The registration statement
was declared effective on June 27, 2005.
Energy Services has a $150 million receivables purchase facility ("Receivables
Facility") with an issuer of receivables-backed commercial paper expiring in
August 2007, although the Receivables Facility may terminate prior to such date
due to the termination of the commitments of the Receivables Facility back-up
purchasers. Under the Receivables Facility, Energy Services transfers, on an
ongoing basis and without recourse, its trade accounts receivable to its wholly
owned, special purpose subsidiary, Energy Services Funding Corporation ("ESFC"),
which is consolidated for financial statement purposes. ESFC, in turn, has sold,
and subject to certain conditions, may from time to time sell, an undivided
interest in the receivables to a commercial paper conduit of a major bank. The
maximum level of funding available at any one time from this facility is $150
million. The proceeds of these sales are less than the face amount of the
accounts receivable sold by an amount that approximates the purchaser's
financing cost of issuing its own receivables-backed commercial paper. ESFC was
created and has been structured to isolate its assets from creditors of Energy
Services and its affiliates, including UGI. This two-step transaction is
accounted for as a sale of receivables following the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Energy
Services continues to service, administer and collect trade receivables on
behalf of the commercial paper issuer and ESFC. At June 30, 2005, the
outstanding balance of ESFC receivables was $64.7 million which amount is net of
$10 million in trade receivables sold to the commercial paper conduit.
In addition, a major bank has committed to Energy Services to issue up to $50
million of standby letters of credit, secured by cash or marketable securities
("LC Facility"). At June 30, 2005, there were no letters of credit outstanding.
Energy Services expects to fund the collateral requirements with borrowings
under its Receivables Facility. The LC Facility expires in April 2006.
CASH FLOWS
OPERATING ACTIVITIES. Due to the seasonal nature of the Company's businesses,
cash flows from operating activities are generally strongest during the second
and third fiscal quarters when customers pay for natural gas, propane and other
LPG and electricity consumed during the heating season months. Conversely,
operating cash flows are generally at their lowest levels during the first and
fourth fiscal quarters when the Company's investment in working capital,
principally accounts receivable and/or inventories, is generally greatest.
AmeriGas Propane and UGI Utilities use revolving credit facilities and Energy
Services uses its Receivables Facility to satisfy their seasonal operating cash
flow needs. Antargaz has historically been successful funding its operating cash
flow needs without the use of its revolver. Cash flow from operating activities
was $316.7 million in the 2005 nine-month period compared to $184.8 million in
the 2004 nine-month period. The increase in operating cash flow principally
reflects our improved results, primarily due to the Antargaz Acquisition. Cash
flow from operating activities before changes in operating working capital was
$406.6 million in the 2005 nine-month period compared with $279.6 million in the
prior-year nine-month period. Changes in operating working capital used $89.9
million in the 2005 nine-month period and $94.8 million in the 2004 nine-month
period.
INVESTING ACTIVITIES. Investing activity cash flow is principally affected by
capital expenditures and investments in property, plant and equipment, cash paid
for acquisitions of businesses, changes in short-term investments and proceeds
from sales of assets. Cash flow used in investing activities was $138.0 million
in the 2005 nine-month period compared to $338.5 million in the prior-year
period principally
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UGI CORPORATION AND SUBSIDIARIES
reflecting the prior-year purchase of the remaining ownership interests in AGZ
Holding and AmeriGas Propane's acquisition of Horizon Propane, net of cash
acquired.
FINANCING ACTIVITIES. Cash flow used by financing activities was $113.7 million
in the 2005 nine-month period compared with $172.6 million of cash provided in
the prior-year nine-month period. Financing activity cash flow changes are
primarily due to issuances and repayments of long-term debt, net borrowings
under revolving credit facilities, dividends and distributions on UGI Common
Stock and AmeriGas Partners Common Units, and proceeds from public offerings of
AmeriGas Partners Common Units and issuances of UGI common stock. The
prior-period cash flows from financing activities reflects the issuance of 15.6
million shares (7.8 million shares on a pre-split basis) of UGI Common Stock
sold in an underwritten public offering to fund the Antargaz Acquisition. On
October 1, 2004, UGI Utilities redeemed all 200,000 shares of $7.75 Series
Preferred Stock at a price of $100 per share together with full cumulative
dividends. The redemption of the $7.75 Series Preferred Stock was funded with
proceeds from the October 2004 issuance of $20 million of 6.13% Medium-Term
Notes due 2034. As previously mentioned, the Partnership refinanced $373.4
million of its outstanding 8.875% Senior Notes due 2011 through the issuance of
$415.0 million of 7.25% Senior Notes due 2015. The Partnership also incurred a
$33.6 million loss on extinguishment of debt in conjunction with its repayment
of the 8.875% Senior Notes. In April 2005, the Partnership repaid $53.8 million
of maturing AmeriGas OLP First Mortgage Notes with proceeds from the AmeriGas
OLP Term Loan, borrowings under its revolving credit facility and existing cash
balances. In May 2005, UGI Utilities refinanced $20 million of its maturing
6.62% Medium-Term Notes through the issuance of 5.16% Medium-Term Notes due in
May 2015. Also during the 2005 nine-month period, UGI Utilities borrowed and
repaid $20 million associated with a short-term loan that matured on March 1,
2005.
We paid cash dividends on UGI Common Stock of $49.9 million and $40.4 million
during the nine months ended June 30, 2005 and 2004, respectively. During the
nine months ended June 30, 2005, the Partnership declared and paid the quarterly
distributions on all limited partner units for the quarters ended September 30,
2004, December 31, 2005 and March 31, 2005. On April 26, 2005, the Partnership
declared an increase in their regular quarterly distribution to $0.56 per
limited partnership unit ($2.24 on an annual basis). The quarterly distribution
of $0.56 for the quarter ended June 30, 2005 will be paid on August 18, 2005 to
holders of record on August 10, 2005.
UGI COMMON STOCK SPLIT AND DIVIDEND INCREASE
On April 26, 2005, UGI's Board of Directors approved a 2-for-1 common stock
split. The Company issued one additional common share for every common share
outstanding which were distributed May 24, 2005 to shareholders of record on May
17, 2005. Basic and diluted earnings per share and dividends declared per share
for the three and nine month periods ended June 30, 2005 and 2004 have been
reflected on a post-split basis. Also, on April 26, 2005, UGI's Board of
Directors approved an increase in the quarterly dividend rate on UGI Common
Stock to $0.16875 per common share or $0.675 per common share on an annual
basis. On July 26, 2005. UGI's Board of Directors declared a quarterly dividend
on UGI Common Stock of $0.16875 per common share payable on October 1, 2005 to
shareholders of record on September 15, 2005.
ANTARGAZ TAX MATTER
Antargaz filed suit against the French tax authorities in connection with the
assessment of non-income tax related to Antargaz owned tanks at customer
locations used to store LPG. Elf Antar France and Elf Aquitaine, now Total
France, former owners of Antargaz, agreed to indemnify Antargaz for all payments
which would have been due from Antargaz in respect of the tax related to its
tanks for the
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UGI CORPORATION AND SUBSIDIARIES
period from January 1, 1997 through December 31, 2000. During June 2005,
Antargaz was required to remit payment to the French tax authorities with
respect to this matter and Antargaz was fully reimbursed pursuant to the
indemnity agreement, which reduced the amount indemnified to approximately E4.0
million ($4.8 million) at June 30, 2005. The indemnity from the former owners is
reflected in "Prepaid and other current assets" in the Condensed Consolidated
Balance Sheet at June 30, 2005. Antargaz had recorded a liability for the tax
relating to tanks of various customer classes for the period from January 1,
1997 through December 31, 2004 of approximately E29.9 million ($40.6 million).
On February 4, 2005, Antargaz received a letter from French authorities which
eliminated the requirement for Antargaz to provide taxes on Antargaz owned tanks
at certain customer locations. In addition, resolution was reached on tax
contingencies relating to a prior year. Therefore, effective December 31, 2004,
Antargaz reversed (1) E8.8 million ($12.0 million) resulting from the exemption
of tanks at certain customer locations and (2) E5.9 million ($7.9 million)
resulting from the resolution reached on a prior year's taxes. The total pre-tax
amount of $19.9 million is reflected in "Other income, net" in the Condensed
Consolidated Statement of Income for the nine month period ended June 30, 2005.
The after-tax effect of this reversal resulted in $14.9 million of net income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154, "Accounting Changes and Error Corrections" ("SFAS 154"). SFAS 154 replaces
APB No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes
in Interim Financial Statements" and establishes retrospective application as
the required method for reporting a change in accounting principle. SFAS 154
provides guidance for determining whether retrospective application of a change
in accounting principle is impracticable and for reporting a change when
retrospective application is impracticable. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). It requires an entity to
recognize a liability for a conditional asset retirement obligation when
incurred if the liability can be reasonably estimated. FIN 47 clarifies that the
term "Conditional Asset Retirement Obligation" refers to a legal obligation to
perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the entity. FIN 47 also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. We are currently evaluating the impact of FIN 47
on our financial position and results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). SFAS 123R replaces SFAS 123 and supersedes Accounting
Principles Board ("APB") Opinion No 25, "Accounting for Stock Issued to
Employees" ("APB 25"). SFAS 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, SFAS 123 permitted entities the option of
continuing to apply the guidance in APB 25, as long as the footnotes to
financial statements disclosed what net income would have been had the
preferable fair-value-based method been used. SFAS 123R requires that the
compensation cost relating to share-based payment transactions be recognized in
the financial statements. The cost is required to be measured based on the fair
value of the equity or liability instruments issued. SFAS 123R covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS 123R is effective with our fiscal year
ending September 30, 2006. Under all of the transition methods, unrecognized
compensation expense for awards that are not vested
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UGI CORPORATION AND SUBSIDIARIES
on the adoption date will be recognized in the Company's statements of income
through the end of the requisite service period. We do not believe that the
adoption of SFAS 123R will have a material impact on our financial position or
results of operations. For disclosure regarding pro forma net income and
earnings per share as if we had determined stock-based compensation under the
fair value method prescribed by SFAS 123, see Note 1 to the Condensed
Consolidated Financial Statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions"
("SFAS 153"). SFAS 153 eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with
an exception for exchanges that lack commercial substance. SFAS 153 specifies
that a nonmonetary exchange has commercial substance if the future cash flows of
the entity are expected to change significantly as a result of the exchange.
SFAS 153 is effective for our interim period beginning after June 15, 2005. The
adoption of SFAS 153 will not have a material effect on our financial position
or results of operations.
In December 2004, the FASB issued FASB Staff Position 109-1, "Application of
FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004" ("FSP 109-1") and FASB Staff Position 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision Within the American
Jobs Creation Act of 2004" ("FSP 109-2"). The American Jobs Creations Act
provides deductions for qualified domestic production activities and
repatriation of foreign earnings. FSP 109-1 and FSP 109-2 did not have a
material effect on the Company's financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are (1) market prices for propane and other
LPG, natural gas and electricity; (2) changes in interest rates; and (3) foreign
currency exchange rates.
The risk associated with fluctuations in the prices the Partnership and our
International Propane operations pay for propane and other LPG is principally a
result of market forces reflecting changes in supply and demand for propane and
other energy commodities. The Partnership's profitability is sensitive to
changes in propane supply costs, and the Partnership generally attempts to pass
on increases in such costs to customers. The Partnership may not, however,
always be able to pass through product cost increases fully, particularly when
product costs rise rapidly. In order to reduce the volatility of the
Partnership's propane market price risk, it uses contracts for the forward
purchase or sale of propane, propane fixed-price supply agreements, and
over-the-counter derivative commodity instruments including price swap and
option contracts. International Propane's profitability is sensitive to changes
in LPG supply costs and International Propane generally passes on increases in
such costs to customers. International Propane may not, however, always be able
to pass through product cost increases fully or on a timely basis, particularly
when product costs rise rapidly. In order to reduce the long-term volatility of
Antargaz' LPG market price risk, Antargaz hedges a portion of its future U.S.
dollar denominated LPG product purchases through the use of forward foreign
exchange contracts. Antargaz may also enter into other contracts, similar to
those used by the Partnership to reduce the volatility in the cost of LPG it
purchases. FLAGA may use derivative commodity instruments to reduce market risk
associated with a portion of its propane purchases. Over-the-counter derivative
commodity instruments utilized by the Partnership to hedge forecasted purchases
of propane are generally settled at expiration of the contract. In order to
minimize credit risk associated with its derivative commodity contracts, the
Partnership monitors established credit limits with the contract counterparties.
Although we use
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UGI CORPORATION AND SUBSIDIARIES
derivative financial and commodity instruments to reduce market price risk
associated with forecasted transactions, we do not use derivative financial and
commodity instruments for speculative or trading purposes.
Gas Utility's tariffs contain clauses that permit recovery of substantially all
of the prudently incurred costs of natural gas it sells to its customers. The
recovery clauses provide for a periodic adjustment for the difference between
the total amounts actually collected from customers through PGC rates and the
recoverable costs incurred. Because of this ratemaking mechanism, there is
limited commodity price risk associated with our Gas Utility operations. Gas
Utility uses exchange-traded natural gas call option contracts to reduce
volatility in the cost of gas it purchases for its retail core-market customers.
The cost of these call option contracts, net of any associated gains, is
included in Gas Utility's PGC recovery mechanism.
The risks associated with fluctuations in prices the Electric Utility pays for
its electric power needs are principally a result of market forces reflecting
changes in supply and demand for electricity and other energy commodities.
Electric Utility purchases its electric power needs from electricity suppliers
under fixed-price energy and capacity contracts and, to a much lesser extent, on
the spot market. In accordance with Provider of Last Resort ("POLR") settlements
approved by the PUC, Electric Utility may increase its POLR rates up to certain
limits through December 31, 2006. In accordance with these settlements,
effective January 1, 2005, Electric Utility increased its POLR generation rates
for all metered customers 4.5% of total rates in effect on December 31, 2004. In
addition, the POLR settlements permit Electric Utility to increase its POLR
generation rates effective January 1, 2006 for all metered customers to a level
that is not greater than 7.5% above the total rates in effect at December 31,
2004. Currently, Electric Utility's fixed-price contracts with electric
suppliers mitigate most risks associated with the POLR service rate limits in
effect through December 31, 2006. However, should any of the suppliers under
these contracts fail to provide electric power under the terms of the power and
capacity contracts, any increases in the cost of replacement power or capacity
would negatively impact Electric Utility results. In order to reduce this
non-performance risk, Electric Utility has diversified its purchases across
several suppliers and entered into bilateral collateral arrangements with
certain of them. Electric Utility has and may enter into electric price swap
agreements to reduce the volatility in the cost of a portion of its anticipated
electricity requirements.
In order to manage market price risk relating to substantially all of Energy
Services' fixed-price sales contracts for natural gas, Energy Services purchases
exchange-traded natural gas futures contracts or enters into fixed-price supply
arrangements. Exchange-traded natural gas futures contracts are guaranteed by
the New York Mercantile Exchange ("NYMEX") and have nominal credit risk. An
adverse change in market value of these contracts may require daily cash
deposits in margin accounts with brokers. Although Energy Services' fixed-price
supply arrangements mitigate most risks associated with its fixed-price sales
contracts, should any of the natural gas suppliers under these arrangements fail
to perform, increases, if any, in the cost of replacement natural gas would
adversely impact Energy Services' results. In order to reduce this risk of
supplier nonperformance, Energy Services has diversified its purchases across a
number of suppliers.
UGID has entered into fixed-price sales agreements for a portion of the
electricity expected to be generated by its interests in electricity generating
assets. In the event that these generation assets would not be able to produce
all of the electricity needed to supply electricity under these agreements, UGID
would be required to purchase such electricity on the spot market or under
contract with other electricity suppliers. Accordingly, increases in the cost of
replacement power could negatively impact the Company's results.
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UGI CORPORATION AND SUBSIDIARIES
We have both fixed-rate and variable-rate debt. Changes in interest rates impact
the cash flows of variable-rate debt but generally do not impact its fair value.
Conversely, changes in interest rates impact the fair value of fixed-rate debt
but do not impact their cash flows.
Our variable-rate debt includes borrowings under AmeriGas OLP's Credit
Agreement, AmeriGas OLP Term Loan, borrowings under UGI Utilities' revolving
credit agreements and a substantial portion of Antargaz' and FLAGA's debt. These
debt agreements have interest rates that are generally indexed to short-term
market interest rates. At June 30, 2005, combined borrowings outstanding under
these agreements totaled $402.5 million. Antargaz has effectively fixed the
interest rate on a portion of its variable rate debt through June 2006 through
the use of interest rate swaps. Our long-term debt is typically issued at fixed
rates of interest based upon market rates for debt having similar terms and
credit ratings. As these long-term debt issues mature, we may refinance such
debt with new debt having interest rates reflecting then-current market
conditions. This debt may have an interest rate that is more or less than the
refinanced debt. In order to reduce interest rate risk associated with near-term
forecasted issuances of fixed-rate debt, from time to time we enter into
interest rate protection agreements.
The following table summarizes the fair values of unsettled market risk
sensitive derivative instruments held at June 30, 2005. Fair values reflect the
estimated amounts that we would receive or pay to terminate the contracts at the
reporting date based upon quoted market prices of comparable contracts at June
30, 2005. The table also includes the changes in fair value that would result if
there were a ten percent adverse change in (1) the market price of propane; (2)
the market price of natural gas; (3) the market price of electricity; (4)
interest rates on ten-year U.S. treasury notes and the three-month Euribor and;
(5) value of the euro versus the U.S. dollar.
Change in
Fair Value Fair Value
---------- ----------
(Millions of dollars)
June 30, 2005:
Propane commodity price risk $ 5.1 $(13.3)
Natural gas commodity price risk -- (4.5)
Electricity commodity price risk 3.9 (1.2)
Interest rate risk (11.5) (6.0)
Foreign currency exchange rate risk 5.8 (14.5)
Gas Utility's exchange-traded natural gas call option contracts are excluded
from the table above because any associated net gains are included in Gas
Utility's PGC recovery mechanism. Because our derivative instruments generally
qualify as hedges under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," ("SFAS 133"), we expect that changes in the fair value of
derivative instruments used to manage commodity or interest rate market risk
would be substantially offset by gains or losses on the associated anticipated
transactions.
Our primary exchange rate risk is associated with the U.S. dollar versus the
euro. The U.S. dollar value of our foreign-denominated assets and liabilities
will fluctuate with changes in the associated foreign currency exchange rates.
We use derivative instruments to hedge portions of our net investments in
foreign subsidiaries ("net investment hedges"). Realized gains or losses remain
in other comprehensive income until such foreign operations are liquidated. At
June 30, 2005, the fair value of unsettled net investment hedges was a gain of
$1.1 million, which is included in the foreign currency exchange rate risk in
the table above. With respect to our net investments in FLAGA and Antargaz, a
10% decline in the value of the euro versus the U.S. dollar, excluding the
effects of any net investment hedges, would reduce their aggregate net book
value by approximately $47.5 million, which amount would be reflected in other
comprehensive income.
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UGI CORPORATION AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the Company's disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures as of the end of the period covered by
this report were designed and functioning effectively to provide reasonable
assurance that the information required to be disclosed by the Company in
reports filed under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. The Company believes that a
controls system, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the controls system are met, and
no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected.
(b) Change in Internal Control over Financial Reporting
No change in the Company's internal control over financial reporting
occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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UGI CORPORATION AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 6. EXHIBITS
The exhibits filed as part of this report are as follows (exhibits incorporated
by reference are set forth with the name of the registrant, the type of report
and registration number or last date of the period for which it was filed, and
the exhibit number in such filing):
EXHIBIT NO. EXHIBIT REGISTRANT FILING EXHIBIT
- ----------- ------- ---------- --------- -------
3.1 Amended and Restated Articles of Incorporation of UGI
Corporation as amended through June 6, 2005.
4.1 Fifth Supplemental Indenture dated April 13, 2005 by and AmeriGas Form 8-K 4.1
among Wachovia Bank, National Association, successor to Partners, (5/9/05)
First Union National Bank, as trustee, AmeriGas Partners, L.P.
L.P., a Delaware limited partnership, and AP Eagle Finance
Corp., a Delaware corporation, to the Indenture dated August
21, 2001 by and among First Union National Bank, as trustee,
AmeriGas Partners, L.P., and AP Eagle Finance Corp.
4.2 Indenture, dated May 3, 2005, by and among AmeriGas AmeriGas Form 8-K 4.1
Partners, L.P., a Delaware limited partnership, AmeriGas Partners, (5/6/05)
Finance Corp., a Delaware corporation, and Wachovia Bank, L.P.
National Association, as trustee.
10.1 Description of oral employment at-will agreement between UGI UGI Form 8-K 10.1
Corporation and Mr. John L. Walsh. (4/7/05)
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UGI CORPORATION AND SUBSIDIARIES
EXHIBIT NO. EXHIBIT REGISTRANT FILING EXHIBIT
- ----------- ------- ---------- --------- -------
10.2 Credit Agreement, dated as of April 18, 2005, by and among AmeriGas Form 8-K 10.1
AmeriGas Propane, L.P., as Borrower, AmeriGas Propane, Inc., Partners, (4/22/05)
as a Guarantor, Petrolane Incorporated, as a Guarantor, L.P.
Wachovia Bank, National Association, as Agent, and
the other financial institutions party thereto.
10.3 Registration Rights Agreement, dated May 3, 2005, by and AmeriGas Form 8-K 99.1
among AmeriGas Partners, L.P., a Delaware limited Partners, (5/6/05)
partnership, AmeriGas Finance Corp., a Delaware corporation, L.P.
AmeriGas Propane, L.P., a Delaware limited partnership,
AmeriGas Eagle Propane, L.P., a Delaware limited
partnership, AmeriGas Propane, Inc., a Pennsylvania
corporation, AmeriGas Eagle Holdings, Inc., a Delaware
corporation, and Credit Suisse First Boston LLC, Citigroup
Global Markets Inc., and Wachovia Capital Markets, LLC.
31.1 Certification by the Chief Executive Officer relating to the
Registrant's Report on Form 10-Q for the quarter ended June
30, 2005, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification by the Chief Financial Officer relating to the
Registrant's Report on Form 10-Q for the quarter ended June
30, 2005, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32 Certification by the Chief Executive Officer and the Chief
Financial Officer relating to the Registrant's Report on
Form 10-Q for the quarter ended June 30, 2005, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-40-
UGI CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGI Corporation
(Registrant)
Date: August 8, 2005 By: /s/ Anthony J. Mendicino
------------------------------------
Anthony J. Mendicino
Senior Vice President-Finance and
Chief Financial Officer
Date: August 8, 2005 By: /s/ Michael J. Cuzzolina
------------------------------------
Michael J. Cuzzolina
Vice President-Accounting and
Financial Control and
Chief Risk Officer
-41-
UGI CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation of UGI Corporation as
amended through June 6, 2005.
31.1 Certification by the Chief Executive Officer relating to the Registrant's
Report on Form 10-Q for the quarter ended June 30, 2005, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer relating to the Registrant's
Report on Form 10-Q for the quarter ended June 30, 2005, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification by the Chief Executive Officer and the Chief Financial
Officer relating to the Registrant's Report on Form 10-Q for the quarter
ended June 30, 2005, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.